There’s only one story that matters this month.
The Securities and Exchange Commission (SEC) has officially declared war on the world’s biggest and most important crypto exchanges.
On the 5th of June the SEC filed 13 charges against Binance and its founder “CZ” Changpeng Zhao. It accuses Binance – the largest crypto exchange in the world – of fraud, market manipulation and operating an unregistered securities exchange.
Then the very next day the SEC went after Coinbase – the largest US crypto exchange, and the only one that’s a legitimate Nasdaq-listed public company.
It charges Coinbase with “Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency”. But unlike Binance, it doesn’t also accuse it of fraud and market manipulation.
This is the end-game move that the cryptosphere has been expecting since the SEC started going after crypto projects back in 2017, when it essentially ended the ICO boom.
Now the SEC it trying to drive all crypto industry out of America. Instead of just going after individual projects, of which there are thousands, it’s now going after the places where people trade them.
If you can’t trade a project, then you can’t use it. And by going after the two biggest exchanges in the game, the SEC is looking to cut off the head of the snake.
If it succeeds, then no other exchanges in the US will stand a chance. Crypto will leave America. And if it loses… then… honestly, who knows?
The two exchanges have very different approaches.
Binance is more like a pirate. It’s truly global, and it’s literally set up to not be headquartered in any one country – for exactly this reason.
What’s more, it’s faced this same problem before, and won.
Back in 2017, Binance was headquartered in China. And if you remember, in September 2017, China banned cryptocurrency. So Binance simply left China and became global.
So, if Binance loses the case, it will likely just leave the US and carry on its global operations as normal.
But Coinbase doesn’t have that luxury.
Coinbase has bent over backwards to try work with US regulators and do everything by the book. The problem is, the SEC refuses to write that book in the first place.
And, as The Wall Street Journal notes, Coinbase generates 82% of its revenue from US customers.
What’s more, Coinbase is a US public-listed company. It trades on the Nasdaq. It has put all its eggs in the US basket. And the SEC is currently holding that basket over the edge of a cliff.
But maybe Coinbase will win the court case?
That’s what Coinbase is banking on. And if it did win, it would really shake things up.
However The SEC’s chair, the indomitable Gary Gensler, has essentially staked his career on this case. So the SEC also has no intention of losing this case.
And they can’t both win.
This is shaping up to be the biggest showdown in crypto history
Over the next few weeks and months, you can expect to see talking heads a plenty discussing and second-guessing the consequences of these lawsuits.
But, as usual, I think Matt Levine’s initial take will be the only one worth your time.
He sees five possible ways this could play out:
1. The SEC wins and crypto is more or less banned in the US. You can still buy Bitcoin and probably Ethereum and maybe Dogecoin in the US, because those are not securities, but any other crypto project is probably a security and not going to be offered for trading in the US. Crypto withers and dies and everyone moves on to artificial intelligence. The SEC kills crypto, as a sort of slow-burn revenge for crypto’s attempt to arbitrage around the SEC.
2. Same, except that crypto develops and flourishes elsewhere, and the US simply misses it. Crypto turns out to be extremely world-changing and valuable, and the US is left behind. Or it turns out to be a weird niche financial product you can trade in Europe but not in the US, like binary options or contracts for differences. Either way it lives on abroad, but not in the US.
3. The SEC wins, and then somebody — some combination of existing crypto firms, new crypto entrants and legacy financial services firms — finds a path forward for crypto to be traded in the US in compliance with US securities laws. Everyone buckles down and says “okay, Solana is going to start filing annual reports with audited financial statements,” and people will start crypto exchanges that register with the SEC and that are separate from the clearinghouses and brokerages, etc. This seems very hard, because the SEC is quite clearly not interested in accommodating any crypto projects. I am not going to sit here and tell you “here’s how crypto firms can register their tokens as securities.” Certainly Coinbase has been trying forever to figure out how to do it — they have pestered the SEC for rules allowing it, etc. — with, so far, not much luck. But I suppose it’s always possible.
4. The SEC loses, the courts say “what, no, none of this stuff is a security,” and crypto continues to trade in the US without much securities regulation.
5. Congress (or a future SEC) steps in to change the rules, saying “well sure all this stuff is technically illegal under existing law, but it is crazy to stifle innovation like this, so we will make new rules to allow for regulated trading of crypto in the US.”
But which outcome does Matt think is most likely?
Here’s what he says:
I don’t know which outcome I would bet on. The last outcome is the one that the crypto industry wants, and there does seem to be some appetite in Congress to write crypto rules.
But I do want to say that the SEC is clearly betting on the first outcome. That is why it is bringing these cases now, after the collapse of FTX and so many other big crypto firms, after crypto prices have fallen, after the venture capitalists have all moved on to AI. These cases, against Binance and Coinbase, are high-risk cases for the SEC: Coinbase and Bitcoin are big well-funded companies with good lawyers and lobbyists, they have the resources and motivation to fight these cases to the end, and they do have decent legal arguments. The SEC might lose! But it is being strategic about maximizing its chances. I wrote in February:
When crypto is popular and exciting and going up, if you are a regulator who says “no, we must stop this,” you look like a killjoy. Investors want to put their money into stuff that is going up, and they are mad at you for stopping them. Politicians like the stuff that is going up, and hold hearings about how you’re stifling innovation. Crypto founders are rich and popular and criticize you on Twitter and get a lot of likes and retweets. Your own regulatory employees, who have an eye on their next private-sector jobs, want to be leaders in crypto innovation rather than just banning everything.
When crypto is going down and so many projects are evaporating in fraud and bankruptcy, you can kind of say “I told you so.” There is just a lot more appetite to regulate, or I guess just to shut everything down. “You are stifling innovation,” the indicted founder of a bankrupt crypto firm can say, but nobody cares.
That is the bet that the SEC is making. Now we’ll see if it’s right.
As Matt says, scenario five is the one that most crypto people want. And, really, it’s the only one where everyone gets to win. Even Gary Gensler could sort of claim a victory if that happens.
But, seeing as most of you don’t actually live in the US, let’s take a look at this from an EU and UK point of view.
This situation could turn into a supreme opportunity for the UK and EU… if they don’t drop the ball
The timing of all this is quite interesting.
As you may know, this month the EU gave the final go-ahead on its Markets in Crypto Assets (MiCA) legislation.
MiCA is a full well-thought-out framework for crypto firms operating within the EU.
As decrypt notes:
The introduction of a consistent set of rules for crypto in the EU has been widely welcomed by the industry and regulators alike. The SEC’s Hester Peirce said MiCA could even serve as a “model” for the U.S. approach to regulating the sector.
And big crypto companies are starting to take notice.
At Blockchain week Brussels, one of the European Commission advisers who worked on MiCA said it “provides a framework in which this community can develop without having to fear constant legal action against them”.
And, again, as decrypt reports, at the same event:
Beata Sivak, crypto exchange Kraken’s head of government relations and policy for Europe, said that MiCA “gives us the ability to really invest in the region. It does give us that legal certainty that we needed.”
Meanwhile, since the UK has stated it wants to be a “crypto hub” (see my previous articles: “The UK goes full crypto… wait, what?” and “The UK is still going full crypto – this could be the start of something BIG”), Coinbase has hinted it may move its headquarters over here.
Here’s what Coinbase’s founder and CEO, Brian Armstrong said at a summit in April:
The UK is our second-largest market in terms of revenue. We’re founded in the US, and I think the US has the potential to be an important market in crypto – but right now, we’re not seeing the regulatory clarity we need.
If a number of years go by where we don’t see regulatory clarity emerge in the US, we may have to consider investing more elsewhere and relocating wherever is necessary.
Well, he made those statements before the SEC decided to sue Coinbase into oblivion. So I’d guess he’s now seriously considering relocating. Time will tell.
Meanwhile, The Telegraph is reporting that the Facebook twins’ Gemini exchange is eyeing the UK as a second headquarters.
From The Telegraph on the 24th of May (that’s a non-paywalled link):
The billionaire Winklevoss twins who sued Mark Zuckerberg over the creation of Facebook are considering a UK base for their cryptocurrency giant, decrying a “hostile” climate in the US.
Cameron and Tyler Winklevoss said that they were thinking about setting up a “second headquarters” for the crypto exchange Gemini in London.
The brothers this week met officials at the Financial Conduct Authority (FCA) and Bank of England as they scout locations to focus Gemini’s investment.
And then, just last week, Andreessen Horowitz – aka a16z aka the most well-known Venture Capitalist in crypto – announced it was expanding to the UK.
We have been working with policymakers and regulators across the globe, and during our discussions it has become clear that the UK government sees the promise of web3, with Prime Minister Rishi Sunak suggesting the UK can become a hub of web3 innovation. UK authorities are also willing to work with the industry to create policies that incentivize startups to pursue decentralization.
More specifically, the UK policymakers and regulators are taking an approach that is uniquely tailored to blockchain and digital asset regulation. This includes:
Working constructively with industry to identify the unique attributes of blockchain technology and how those attributes shape the risk profile of decentralized services vs. centralized services.
Laying the foundation for future applications of blockchain technology.
Putting forth an innovative sandbox approach to regulation.
Focusing on an outcomes-based approach.
All the while continuing to keep consumer protection front-and-center of any regulation.
Then it continues:
While there is still work to be done, we believe that the UK is on the right path to becoming a leader in crypto regulation. The UK also has deep pools of talent, world-leading academic institutions, and a strong entrepreneurial culture. It is home to more “unicorns” than Germany, France, and Sweden combined; to some of the world’s largest financial markets and pools of capital; and to highly-sophisticated, world-class regulators. All of these make the UK strongly positioned to lead in web3.
Because of this, we announced today that we will open a16z’s first office outside of the United States, in London. This new office, slated to open later this year, will be led by General Partner, Sriram Krishnan, who along with a team, will work to grow the crypto and startup ecosystem in the UK and Europe.
The announcement even includes a statement from UK Prime Minister, Rishi Sunak:
As we cement the UK’s place as a science and tech superpower, we must embrace new innovations like Web3, powered by blockchain technology, which will enable start-ups to flourish here and grow the economy.
That success is founded on having the right regulation and guardrails in place to protect consumers and foster innovation. While there’s still work to do, I’m determined to unlock opportunities for this technology and turn the UK into the world’s Web3 centre.
That’s why I am thrilled world-leading investor, Andreessen Horowitz, has decided to open their first international office in the UK – which is testament to our world-class universities and talent and our strong competitive business environment.
Imagine if crypto does turn out to be a truly world-changing technology. And imagine if, instead of its epicentre being the US – as happened with the internet – its epicentre is Europe and the UK…
Wouldn’t that be something?
That is, if we’re not all wiped out by a rogue AI making the universe into paperclips first… as many, many people seem to fear is about to happen.
And on that uplifting note, I’ll leave you.
Thanks for reading.
PS while all this has been going on, Blackrock – the largest asset manager in the world, with over $9 trillion assets under management – decided this week would be a good week to try get permission from the SEC for a Bitcoin ETF. I wonder what the odds are on it being approved...
Full disclosure: At time of writing, I held the following cryptos: Ethereum, IOTA, Radix, Mina Protocol, Aleph Zero.
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