Analyzing the SEC’s War on Crypto

Anyone who’s even vaguely followed American politics over the past few years has likely become familiar with the term “witch hunt” frequently spouted by former president Donald Trump. Can this phrase be used in equal measure to describe the latest actions of the SEC against the cryptocurrency sector?

This is a multifaceted question and there are many moving parts to explore. Still, there’s little doubt that the actions taken by the SEC over the coming weeks and months could have a dramatic impact upon the crypto ecosystem as a whole.

Let’s obtain a basic overview of the current state of play before examining some potential outcomes envisioned by Ron and Tom at the Crypto Lists site.

What’s the Role of the SEC?

The Securities and Exchange Commission (SEC) is a government watchdog that oversees financial services across the United States. It can roughly be compared to the UK Financial Conduct Authority (FCA). The SEC is concerned with three core tenets:

• Ensure an orderly and fair marketplace.
• To protect investors.
• Promote the formation of additional capital.

Seems relatively straightforward, right? Well, yes and no. In theory, the SEC represents an invaluable tool that can reign in big business, prevent monopolies and punish the “bad seeds”. This is good news for us all and yet, the SEC is not without its limitations. Be sure to have a flashlight ready, as we’re about to enter into shadowy territory.

What Jurisdiction Does the SEC Have?

We can already see that the Securities and Exchange Commission has a great deal on its plate. According to their own website, this organization oversees more than $115 trillion dollars worth of assets across the US equity markets. Financial securities, commodities and currencies obviously represent a sizeable portion of their efforts. This is where we run into a slight problem.

What exactly is cryptocurrency? Is it a security, a commodity, a currency, or something that can’t be so easily pigeonholed? This is the exact same question that has been plaguing legislators in recent times. So far, they haven’t been able to come up with a firm definition. So, a problem arises.

What power does the SEC have over the crypto landscape in this case? Until they clarify the financial status of cryptocurrencies as a whole, they won’t be able to regulate how cryptocurrencies are traded (such as already occurs within countless other asset classes).

This is when things get even more complicated. Although the SEC’s role in direct relation to cryptocurrencies has yet to be defined, it can still crack down on lenders and exchanges. Examples include Kraken’s exodus from the US marketplace in February, the charges brought against FTX founder Sam Bankman-Fried and the recent tit-for-tat battle with Binance.

What Issues Does the SEC Have with Cryptocurrencies?

Several points have been made by SEC regulators including problems with transparency, issues of fraud, a lack of investor understanding, and the presence of “unregistered national securities exchanges” (Binance is an example).

Now, we shouldn’t go as far as to say that the SEC is against cryptocurrencies. It simply wishes to provide a clear regulatory platform that protects exchanges as well as crypto enthusiasts. The issue here is that the notion of clamping down on a decentralized exchange essentially violates one of the core principles of the crypto marketplace. This has some enthusiasts mildly concerned while others have already begun to run for the hills.

Now that we’ve taken a look at the role of the SEC and its relationship with cryptocurrencies, we should move on by discussing how this growing conflict could unfold and some possible outcomes.

Scenario 1: US-Based Crypto Exchanges Take the Fight to the SEC

Think of this as a Rocky versus Apollo Creed battle. Some cryptocurrency exchanges could very well decide to stand their ground against the long shadow of the SEC. Such a legal conflict might even make its way to the US Supreme Court. While this would indeed be a valiant effort, the problem here is that crypto platforms will inevitably enter into a lengthy and expensive legal battle. Also, the outcome would be far from certain. If the court decides in favor of the SEC, these actions would still be in vain.

Scenario 2: Crypto Firms are Obliged to Register with the SEC

This represents a “middle-of-the-road” outcome. In fact, the SEC has already claimed that registration is a relatively simple and straightforward process. In theory, this would allow exchanges to continue their US operations while enjoying a greater level of transparency (allaying the worries of some investors).

Unfortunately, registering with the SEC is an extremely costly, complicated and time-consuming strategy. Once again, this isn’t likely to sit well with crypto brokerages.

Scenario 3: The SEC Changes its Formal Definition of am Exchange

One of the more likely scenarios involves how the SEC might choose to modify its view of exchanges so that they include cryptocurrencies. During an April meeting, Securities and Exchange Commission Chair Gary Gensler proposed this rough definition (1):

“A system that brings together buyers and sellers of securities through structured methods to negotiate a trade.”

Of course, several hurdles would still need to be overcome. Lawmakers will have to agree on the exact wording before any such legislation is passed. Enforcement is another question. What legal precedents would be used to pass judgement? These are only a handful of sticking points that don’t really have any clear answers.

Scenario 4: Mass Exodus

Why not simply seek life elsewhere? This notion has already been explored by major crypto powerhouses including Coinbase, Gemini and Bittrex (the latter having completely shut down its US operations).

When we consider that these businesses could be soon staring down the barrel of an SEC lawsuit similar to Coinbase, relocating outside of the United States marketplace is a rather practical solution. This would have a profound effect upon the domestic US crypto ecosystem and it might even spell the death of a marketplace that has only recently begun to gain ground.

Is There a Crypto Endgame in Sight?

We’re now left with a single, glaring question. How will the near-term future of US-based crypto firms unfold? To be perfectly clear, the United States government isn’t particularly famous for passing large-scale reforms in an efficient manner. It’s likely that there will be a great deal of haggling, kissing babies and shaking hands behind closed doors.

This is even more relevant if well-established firms such as Coinbase decide to square off with the SEC. In the event that Coinbase actually pulled off a win, this would provide the entire crypto community with further ammunition to challenge ongoing regulatory principles.

We’ll also point out that cryptocurrencies aren’t limited to the United States. Other regions of the world such as Asia, Africa and Europe have already become centralized hubs for this decentralized currency. As opposed to stifling US-based crypto exchanges, investors could simply look across the pond to do business.

Considering the fact that the US has already begun to lag behind other fast-growing economies, this might represent an excellent opportunity for countries such as China to step up to the plate and to deal Uncle Sam yet another embarrassing financial blow.

Either way, there’s little doubt that some big changes are looming just over the not-so-distant horizon. Be sure to keep up to date with the latest news and analyses provided by Crypto Lists. After all, change isn’t always a bad thing.