The Securities and Exchange Commission is engaged in a multifront battle against actors in the digital asset industry that intensified this week after it filed lawsuits against Binance Holdings Inc. and Coinbase Global Inc.
COIN,
two of the largest cryptocurrency exchanges in the world.
But there is a growing sense in Congress and among former regulators that SEC Chairman Gary Gensler has bit off more than he can chew and is undermining congressional efforts to regulate the digital asset industry.
“The latest enforcement action against Coinbase is an egregious example of regulation by enforcement,” Rep. Ritchie Torres, a New York Democrat, told MarketWatch. “It demonstrates a complete contempt for Congress which is in the process of developing a framework” for crypto regulation.
Read more: SEC charges Coinbase for illegally operating an unregistered securities exchange
Gensler has signaled his growing displeasure with the industry in speeches, congressional hearings and media appearances, telling a congressional panel in April, “I’ve been around finance for 40 years…I’ve never seen a field so noncompliant with laws written by Congress.”
Torres, who sits on the House Financial Services Committee that oversees the SEC, says Gensler’s current stance is evidence of a radical revision of his views on the technology from when he taught a course on blockchain and money at MIT in 2018.
“His view of the law has been constantly changing,” Torres said. “Mr. Gensler has gone from a crypto cheerleader to a crypto skeptic,” a change that Torres believes is motivated by politics. “He’s portraying crypto as the villain in order to portray himself as a political hero.”
The SEC declined to comment.
See also: SEC charges Binance and founder CZ with mishandling customer funds, illegally serving U.S. investors
Republican members of the House Financial Services Committee have long been critical of the Biden-appointed Gensler, and they maintained their criticisms in recent days.
Arkansas Rep. French Hill, who chairs the House subcommittee on digital assets, said at an event Monday that the moves against Coinbase and Binance were “CYA” to distract from the SEC’s failure to prevent the collapse of FTX, “ the biggest fraud and the biggest malfeasance in American financial history.”
Gensler has touted the number of crypto-related enforcement cases the SEC has brought, estimating the number to be 140 in an interview last month at the Atlanta Federal Reserve Financial Markets Conference. The ambition of these actions has ramped up significantly with the Binance and Coinbase suits, according to Philip Moustakis, former senior counsel in the SEC’s enforcement division.
He argues that the Coinbase case, which alleges no fraud and is instead focused on Coinbase’s failure to register with the SEC as a securities exchange, is a waste of the SEC’s enforcement resources.
The Coinbase lawsuit in part rests on the SEC’s assertion that several tokens offered on the Coinbase platform are securities and therefore Coinbase is operating as an unregistered securities exchange.
Moustakis said that the law is unclear on whether these tokens, like Solana
SOLUSD,
and Cardano
ADAUSD,
are actually securities and that a good lawyer could make an honest case for both sides of the argument.
“That doesn’t seem the best use of the time and resources of the enforcement division, which one would hope would be focused on clear violations of the law,” Moustakis, currently a partner at the law firm Seward & Kissel, said.
The SEC will have to spend significant resources on these cases, given that it has alleged that more than a dozen popular cryptocurrencies are securities, expanding the number of people with an economic interest in the SEC losing its case.
“The SEC filed its case against Ripple about two and a half years ago, and that involves a single token,” Moustakis said. “Each of the tokens named in the Binance and Coinbase complaints have issuers, investors or other market participants with an economic interest in the outcome of the litigation.”
The SEC sued Ripple Inc.
XRPUSD,
under previous SEC Chairman Jay Clayton in 2020 for selling unregistered securities.
Industry representatives argue that the U.S. government has launched a “war against crypto,” and are increasingly pinning their hopes on Congress passing legislation that would create a new framework for cryptocurrency regulation.
Katherine Dowling, a former assistant U.S. attorney and general counsel at Bitwise asset management, a crypto asset manager, says a crypto market structure bill is “urgently needed.”
She argued in an interview with MarketWatch that these recent enforcement cases could motivate Congress to work more diligently on legislation that would create space both for consumer protection and for the crypto industry to thrive.
Betting on speedy action in Congress, however, is usually a losing strategy, according to Ian Katz, a financial services analyst for Capital Alpha Partners.
“There’s a line of thinking that the SEC’s actions will spur Congress to move quickly to pass sweeping crypto legislation,” he wrote in a Thursday note. “The logic is reasonable, but doesn’t account for Congress’ inability to perform complicated tasks that aren’t essential to keeping the country afloat.”
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