The SEC vs. Crypto

Imagine that you take the same thoroughfare to get to work every day. No stop signs or traffic lights are on your route, so you cruise right along without a care in the world. One day, you’re jolted to a screeching halt by a big new red stop sign. One of the main intersections turned into a four-way stop overnight.?

Later that evening, you open your mailbox to find an official letter from local law enforcement. You’re shocked to see that you’re retroactively being fined tens of thousands of dollars, one ticket for every time you failed to stop at the newly-formed four-way stop.?

It sounds ridiculous, but this is essentially the SEC’s approach to crypto regulation in the U.S. And that's what we're getting into in today's Triple Entry.?

Strap in. We've got a humdinger for you in this TWENTIETH (?!) edition of Triple Entry.?

The Legal Battles with Coinbase and Binance, Explained

The SEC Throws a One-Two Punch

In a move that sent shockwaves through the crypto community, the SEC filed lawsuits against Coinbase and Binance last week. The allegations? Operating unregistered exchanges and offering the sale of unregistered securities. The SEC argues that virtually every business activity these crypto platforms conduct must be registered with the agency and follow securities regulations under the watchdog’s oversight.?

?As the dust settles from the SEC's seismic move against the two crypto titans, it's clear that this was a storm brewing on the horizon, particularly after Coinbase received a?Wells Notice ?earlier this year. The fallout from these lawsuits will undoubtedly shape the future of crypto in the U.S., and it's crucial to understand the nuances of each case. In this issue of Triple Entry, we'll dissect the following:

1. The contrasting narratives in the Binance and Coinbase lawsuits
2. The ripple effects these cases could have on the broader crypto landscape
3. The potential paths forward in this regulatory maze

Binance: A Web of Deception?

Before we delve into the details, it's crucial to highlight the stark contrast between these two lawsuits, despite their consecutive filings. Picture this: if we were in a school setting, Coinbase would be the apple-polishing star pupil, while Binance would be the habitual mischief-maker, constantly pushing the boundaries.?

The SEC's lawsuit against Binance is a heavyweight punch, alleging a range of misconducts. The allegations include?internal wash trading ?and self-dealing activities, which were undertaken to inflate trading volumes on Binance.US artificially. This is a serious charge, suggesting that Binance was more interested in appearing successful than conducting business ethically.

The lawsuit also questions the independence of Binance.US, suggesting that the parent company, Binance International, maintained significant control over its U.S. subsidiary. Upon recognizing that catering to U.S. customers on Binance.com could potentially classify the centralized exchange (CEX) as an unlicensed securities exchange (a fact highlighted by the SEC's Twitter account), Binance sought the expertise of several advisors to guide them in navigating potential legal challenges. This is a critical point, as it could extend the SEC's jurisdiction beyond the U.S. subsidiary to the broader Binance International organization.

Yes, this is an actual?Tweet ?of something Binance’s former COO actually said.?

The SEC also takes issue with multiple products offered on the U.S. platform, labeling them as securities. These include Binance’s BNB, BUSD, BNB Vault, and Simple Earn programs. The SEC's case also highlights the?commingling and diversion of customer funds , a serious concern for any financial institution.

In essence, the SEC is painting a picture of a company that has been playing fast and loose with regulations and customer funds. Given these allegations, it's unsurprising that the SEC has taken action against Binance. The company does appear to have some skeletons in its closet.

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Coinbase: The Rule Follower?

On the other side of the coin (pun intended), we have Coinbase. Unlike Binance, Coinbase has played mainly by the rules. The company has been a model of regulatory compliance, even going so far as to become a publicly-listed, regulated U.S. exchange. Us accountants know all too well what kind of hoops public companies need to jump through. In a recent?Wall Street Journal interview , Coinbase CEO Brian Armstrong even gave bean counters a shoutout (sort of):

"Coinbase is based in the U.S. We're a public company, which means we have strict requirements, for instance, around audited financial statements. So, when we say that customer funds are segregated and they're backed one to one, you don't have to take our word for it. Our external big four auditing firm is looking at that."

However, the SEC's lawsuit against Coinbase alleges that the company operates as an unregistered exchange, broker, and clearing agency. The SEC asserts that specific tokens and staking programs offered by Coinbase are securities that should have been registered. The complaints against the Coinbase platform and prime brokerage are as expected. However, a fascinating element of the lawsuit is the SEC's claim that Coinbase provides brokerage services through its non-custodial digital wallet, the Coinbase Wallet. This unique stance suggests that offering a non-custodial software product equates to providing a brokerage service.

The regulator's decision to single out specific tokens as securities is an intriguing twist in the SEC's lawsuits against Coinbase and Binance. This list includes a host of popular tokens such as SOL, ADA, MATIC, FIL, AXS, SAND, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. This suggests that the SEC's stance is evolving to view almost all cryptocurrencies, with the notable exception of BTC, as securities. Another notable exception is that of Ether (ETH). When questioned by Representative McHenry during a House Financial Services Committee hearing about whether Ether was a commodity or a security, SEC Chair Gary Gensler?nervously sidestepped the question , leaving the status of Ether up in the air.

Despite these allegations, it's important to note that Coinbase has operated mainly within the confines of existing regulations. The company has demonstrated a commitment to compliance and has been transparent in its operations, which is why it is no surprise that they’re planning on fighting these allegations in court.?

Impact on the Crypto Industry and Road Ahead

These lawsuits raise several questions. Is the SEC trying to protect us from the legitimate legal misdeeds of Binance? Why did the SEC allow Coinbase to IPO if they knew it was an illegal, unregistered securities exchange? Is everything a security now? How did the SEC decide which tokens to list as securities?

The Legal Battle Begins

Despite these questions, some believe that the SEC will unlikely win the suit against Coinbase. According to a?Twitter thread ?by MetaLawMan, the SEC's case has a fatal flaw. The problem is entirely of SEC Chair Gary Gensler's own making. Gensler?testified to Congress ?that the SEC does not have authority from Congress to regulate crypto exchanges. If the SEC sues Coinbase, the Coinbase legal team will likely focus on the communications within the SEC leading up to Gensler’s testimony.

Brian Armstrong, Coinbase's CEO, might have a horse in this race, but he's not shy about sharing his two cents. He's got a swagger in his step and a twinkle in his eye as he confidently predicts a win for Coinbase. In a recent?Wall Street Journal interview , Armstrong laid out his argument like a seasoned lawyer in a courtroom drama. He said, “This is not a good fact pattern for them (the SEC). A jury or a judge would look at this and say, 'Look, this company was formally petitioning you for clarity. They met with you 30 times, developed their own internal framework working with the best lawyers in the world, and you never gave them any feedback on it. Then you hit them with this enforcement action. That's not fair, and that's not good for America.'”

But hold your horses! This isn't a quick-fire episode of Judge Judy. We're talking about a legal battle that could drag on for years before we see any concrete case law establishing regulatory clarity in the U.S. The ideal scenario? Congress swoops in like a superhero, creating clear laws for digital asset markets. And it seems our heroes might have already arrived. Last week, Patrick McHenry, Chairman of the House Financial Services Committee, and Glenn "GT" Thompson, Chairman of the House Committee on Agriculture, introduced a?digital asset market structure proposal . Their goal? To provide "a statutory framework for digital asset regulation intended to provide clarity, fill regulatory gaps, and foster innovation, while providing adequate consumer protections." Now that's a plot twist we can get behind!

Crypto Leaves the Country?

Some industry professionals believe that the SEC's actions could drive crypto companies away from the U.S. and weaken consumer confidence in crypto within the country. The SEC's intent to police the space through enforcement without a regulatory framework could knock down the already weak consumer confidence in cryptocurrencies in the country. This could open up more opportunities for other jurisdictions, such as Hong Kong, Dubai, Singapore, and the UK, to drive innovation and attract capital and talent.

In fact, just yesterday a Hong Kong lawmaker decided to?shoot his shot ?by straight up inviting “all virtual asset trading operators including Coinbase to come to Hong Kong for application of official trading platforms and further development plans.” Furthermore, a16z announced that they’re opening their first international office in London later this year. Why the UK? Chris Dixon, a partner at the firm explains in a tweet, “The UK Prime Minister & policymakers across both parties see the promise of web3 and are committed to putting the right regulation and guardrails in place to protect consumers, foster innovation, and allow start-ups to flourish there. We’re excited to help them with this effort.”

The SEC's actions are seen as unacceptable by some, with the Blockchain Association's CEO, Kristin Smith,?stating that the SEC doesn't make the law ?and that this approach to regulation is unacceptable. She believes the SEC is trying to circumvent formal rulemaking processes and deny public engagement.?

In the short term, there could be downside pressure on the prices of crypto stocks, altcoins, and valuations of crypto startups based in the US. Investors are likely to keep funds in crypto but divest towards Bitcoin because these are unlikely deemed as a security or stablecoins due to their correlation with fiat.

In the medium and long term, exchanges will be cautious when dealing with customers based in the US and providing access to what the SEC claims to be securities. On Friday,?Robinhood announced ?that it would delist tokens for Solana, Cardano, and Polygon after the SEC suit named them as securities.

Crypto Fights Back?

As we navigate these choppy regulatory waters, we must remember that we, as crypto investors and companies, are not powerless. We can fight back against these charges and advocate for a more crypto-friendly regulatory environment.

One way to do this is by supporting advocacy groups like?Coin Center ,?Coinbase , and the?Digital Freedom Alliance . These organizations are at the forefront of the fight for crypto, pushing for policies that foster innovation and protect investors. Ryan Selkis, for instance, has launched the Digital Freedom Alliance, an advocacy organization aimed at running pro-crypto messaging campaigns to counter the relentless FUD surrounding the crypto industry.

Coinbase, on the other hand, has initiated the Crypto 435 campaign, a movement aimed at advancing pro-crypto policy in all 435 Congressional Districts across the U.S. The campaign seeks to grow the crypto advocacy community and provide tools and resources to make your voice heard.

But advocacy doesn't stop at donations or joining campaigns. It's also about making our voices heard directly to those in power. Reach out to your local Congressional leaders to express your concerns about the current anti-crypto regulatory climate. You can identify your representatives on the official?U.S. House of Representatives website , research their stance on crypto policy, and send them a letter expressing your views.

Some of our representatives are already lacing up their boots and getting into the ring. Take Ohio's own Congressman Warren Davidson, for instance. He's not pulling any punches. Davidson has filed the?SEC Stabilization Act , aiming to give the SEC a major overhaul and, in a move that's got Twitter all aflutter, to #FireGaryGensler .

That's right, folks. #FireGaryGensler was lighting up Twitter like a Christmas tree on Monday night. It seems the crypto community isn't shy about making their feelings known. And who can blame them? This is one fight that's far from over.

In conclusion, while the SEC's lawsuits against Coinbase and Binance mark a significant turning point in the relationship between the crypto industry and regulators, they also present an opportunity. It is an opportunity for us to come together as a community, advocate for our rights, and shape the future of crypto in the U.S.

Let's seize it.

Spotlight????- The Future of Accounting: VeeCon 2023

A few weeks ago I teased that some of the Bitwave crew and I were headed to VeeCon (and yes, I did get to meet Gary Vee, and yes it was an honor!). You might have already seen some of the content from the conference trickling out across socials; I had the privilege of speaking on a panel about the future of accounting (and accounting for the future). It was a great conversation, so I hope you check it out!?

The Water Cooler ??

Things worth talking about at the office water cooler…if you 1) talk to people, 2) still work in an office, and 3) have a water cooler.

???????Featured Funding: The Wartime Effort

Today's featured funding is, in a way, YOU. Rather than doing what we usually do in this section and spotlighting a startup funding event in web3 accounting and finance, we’re just going to reiterate our encouragement to support or subscribe to crypto advocacy groups like?Coin Center ,?Crypto 435 by Coinbase , and the?Digital Freedom Alliance ?(or others you might encounter) in this contentious time of regulatory and litigious animosity. Maybe it feels a little bit like we’re petitioning you to grow a Victory garden, but then again, it only takes a few pebbles to start an avalanche. You never know how much a small act might impact the future of this industry.?

Extraordinary Items ??

We'll wrap this up with some news that is "breaking" indeed.?

"Your honor, my client is simply built different."?[main theme plays]