Source: The Wall Street Journal
Compiled by: Bitpush BitpushNews
Last year, the US Securities and Exchange Commission (SEC) sued crypto exchanges Binance, Coinbase and Kraken, accusing these platforms of conducting unregistered securities sales, but crypto executives refused to comply with financial rules they believed were unsuitable for digital currencies.
On one side is the crackdown led by current Chairman Gary Gensler, and on the other side is the crypto industry demanding the formulation of new crypto-specific regulations and calling for a more relaxed regulatory approach. If the SEC wins in court, these victories will force the free market to comply with institutional rules that have been in place for a long time, in order to protect investors who purchase securities. But the lawsuits may take years to resolve, and with Donald Trump's re-election, Gensler no longer has time to handle these big cases.
Trump's return to the White House means that crypto will enter a new era - government barriers will be reduced.
The president-elect has shed his previous skepticism about crypto, promising to support the digital asset industry, and he also hopes to impose restrictions on the independence of institutions such as the SEC and the Federal Reserve. Crypto industry leaders also expressed support for his return.
The next SEC chairman may provide favorable solutions to crypto exchanges, and a lawyer seen as a potential successor to Gensler has positioned himself as a critic of Gensler's lawsuits. Former SEC General Counsel Robert Stebbins said the agency should suspend most crypto lawsuits while clearing a path for these companies to operate without litigation uncertainty.
"As long as there are no fraud allegations, my sense is that the Commission may eventually dismiss these cases," Stebbins said.
Other candidates on Trump's list include former SEC Commissioner Paul Atkins and former Coinbase Chief Legal Officer Brian Brooks, who declined to comment.
Dropping the lawsuits would mean an end to the confrontational approach to the crypto industry, which began in 2017 during Trump's first term, when the market was flooded with new digital assets being sold to the public without any restrictions. Trump was critical of crypto in the early part of his term, saying its value was "based on nothing".
At the end of Trump's first term, the SEC sued Ripple Labs, which had sold $1.3 billion worth of the crypto XRP. Last year, the SEC suffered a major setback in that case when it lost.
The rise of crypto exchanges in the early days of the Covid pandemic made it easier for a new wave of retail traders to enter the market, driving digital currency prices to new highs.
Gensler has shifted the SEC's focus from hundreds of token issuers to these exchanges and similar intermediaries.
He believes this is a more effective way to address the rampant non-compliance. The SEC's previous investigations had reached dozens of settlements with smaller market participants, but failed to prevent exchanges from adding many new tokens to their platforms.
In 2022, the sudden collapse of crypto exchange FTX and the successive failures of crypto lending firms seemed to confirm Gensler's warnings about the rapidly growing, unregulated market. Due to fraud and poor industry risk management, individual investors lost billions of dollars in their holdings.
Months after the FTX collapse, the SEC issued its harshest allegations, accusing Coinbase, Kraken and Binance of operating unlicensed exchanges because they did not comply with investor protection laws when selling securities.
While some smaller companies chose to settle with the SEC, large exchanges believe this is not a viable option. For them, settling on the SEC's terms would mean failure. In the case of Coinbase, it would have to delist many traded digital currencies and stop offering services like staking. Staking is a way for traders to earn additional returns by holding tokens. Other SEC requirements prohibit exchanges from holding investors' assets, forcing exchanges to split their business into separate companies.
Crypto companies argue that investment regulations designed for Wall Street do not apply to digital tokens intended to operate on peer-to-peer computer networks. For example, Coinbase has stated that most cryptocurrencies are similar to commodities or collectibles, and has compared them to baseball cards or Beanie Babies.
Gensler will step down next month, and some of the SEC's legal arguments have been accepted in the preliminary stages of the lawsuits. In one of his recent victories, a federal judge in San Francisco fully rejected Kraken's argument and accepted the SEC's view on how to apply the legal test to determine which investments are securities.
In a recent speech, Gensler said, "Courts across the country have affirmed our actions to protect investors, rejecting all arguments that the SEC cannot enforce the law when securities are issued - no matter the form of the security."
Other judges have expressed reservations.
This summer, Washington, D.C. District Judge Amy Berman Jackson dismissed some of the SEC's allegations against Binance, writing: "The agency's decision to regulate this multi-billion dollar industry through case-by-case litigation, token-by-token, court-by-court, may not be the most effective approach, and could lead to inconsistent results."
Some experts say the SEC has positioned itself as a policeman, wasting valuable time that should have been spent drafting new rules to provide more direct protection for investors and consumers. "This is not the right approach," said Sarah Hammer, executive director of the Wharton School at the University of Pennsylvania.
In a November speech, Gensler said he was simply continuing the strategy adopted by his predecessor, Jay Clayton, who led the SEC during Trump's first term.
Others argue that Gensler had no choice but to use enforcement to crack down on crypto companies he believed were violating securities laws. Marc Fagel, former head of the SEC's San Francisco office, said that if Gensler had chosen to provide new industry regulations, companies would likely have challenged those regulations, and the two sides would still end up in court.
"Any rule that is not 100% accepted by the crypto industry will be litigated to death," Fagel said.
