The SEC has embarked on a full-blown political fight over cryptocurrencies

Article written by: Michael J. Casey

Article translation: Block unicorn

Michael Casey said that the U.S. Securities and Exchange Commission (SEC)’s lawsuit against Binance and Coinbase may last for years in the U.S. legal and political system.

The U.S. Securities and Exchange Commission’s (SEC) lawsuit against Binance and Coinbase this week has posed a high-stakes battle that will pit three branches of the U.S. government against each other for power to decide whether the cryptocurrency industry will permanently leave the U.S. and define the future of digital currencies.

The SEC’s aggressive actions against Binance, the world’s largest cryptocurrency exchange, and Coinbase, the largest in the U.S., showcase the agency’s extraordinary discretion. In an interview following the announcement, SEC Chairman Gary Gensler said “we don’t need more digital currencies,” seemingly suggesting he really wants to destroy the cryptocurrency industry.

By bringing every legal avenue available to it against Binance, a thoroughly international company and its high-profile CEO, Changpeng Zhao, also known as “CZ,” the SEC is attempting to prove that its power extends beyond the borders of the United States. Among other claims, the SEC’s lawsuit alleges that Binance offered unregistered securities and commingled customer funds.

In the Coinbase case, the SEC is clearly targeting far more than just one defendant. The case is based on the notion that most securities traded on the San Francisco-based exchange are unregistered securities, which raises legal issues for Algorand, Polygon, and Solana, among others. These actions directly hit the centralized finance (CeFi) system that Binance and Coinbase’s custody model is based on, and indirectly hit some of the main protocols that decentralized finance (DeFi) relies on.

But this is far from an easy task for the SEC. For one thing, these cases could take years to decide or resolve — if the SEC’s three-year lawsuit against Ripple Labs is any indication. Both Coinbase and Binance have vowed to put up a tough fight in court, which will put even more pressure on the resource-strapped SEC enforcement team to cope with the enormous workload.

Moreover, the SEC’s tough stance has not been widely supported in other areas of the U.S. government. The timing of these actions is such that the agency is almost urging other power centers to deal with it.

Other branches of government, other perspectives

First, let’s look at Congress. A draft bill that is being introduced in the House of Representatives sets parameters for how digital assets should be classified and limits the SEC’s ability to interpret cryptocurrencies under existing securities laws, thereby limiting its ability to initiate such enforcement actions. The bill is co-sponsored by House Financial Services Committee Chairman Patrick McHenry (R-N.C.), who has been critical of Gensler’s tough actions on the cryptocurrency industry, and Agriculture Committee Chairman Glenn Thompson (R-Pa.), who is the director of the Commodity Futures Trading Commission (CFTC), another important agency vying for a greater say in cryptocurrency regulation.

It is doubtful that McHenry-Thompson's bill will make it through the Democratic-controlled Senate and eventually become law during the current electoral term, but the proposed legislation has become a prominent issue as the election season accelerates.

This brings us to the second branch of government: the executive branch, under which the SEC and other such agencies fall. These lawsuits will land in the middle of a presidential campaign in which the future of cryptocurrencies and digital assets will be part of the public debate like never before.

Already, support for cryptocurrencies has come from three presidential hopefuls: Robert F. Kennedy Jr., who is challenging Biden for the Democratic nomination; Florida Gov. Ron De Santis, who is seen as a primary challenger to former President and third-time candidate Donald Trump; and biotech entrepreneur Vivek Ramaswamy, another Republican contender. Republican frontrunner Trump himself has used non-fungible tokens as a fundraising tool so far, though his statements on cryptocurrencies have been mixed. (Of course, his indictment on federal charges Thursday night raises major questions about his candidacy.)

This level of attention on the industry will help shape political attitudes about how the SEC handles these cases in the future, regardless of whether Biden remains president.

Then there’s the Supreme Court, which last month curtailed the Environmental Protection Agency’s (EPA) power to enforce regulations against landowners under the Clean Water Act. What does this have to do with the SEC and cryptocurrencies? Conservatives who now control the court believe the EPA is just the first regulator whose powers need to be curtailed. A larger attack on executive agencies is coming, and the SEC may be a target.

In other words, a perfect political storm is brewing, making the outcome of this current war on cryptocurrencies difficult to predict.

What happens next?

The multifaceted nature of this battle also raises the stakes for this outcome, even if we may have to wait years to see it.

If Gensler’s all-out attack strategy wins, it could be the de facto death knell for cryptocurrencies in the U.S. Developers will leave in droves for Dubai, Bermuda, Singapore, France, or a host of other jurisdictions that are actively setting regulatory barriers to crypto innovation.

This is not to say that certain bank-sanctioned stablecoin ideas or real asset tokenization strategies led by existing, regulated institutions and public companies wouldn’t be allowed or even encouraged in the United States. But because these may struggle to interface with the permissionless architecture of banned “crypto” blockchains, outdated U.S. capital markets may struggle to compete with new models of programmable money and decentralized governance being fostered elsewhere.

But it won’t be a simple matter for the SEC, rather, time and a growing counterattack from cryptocurrency advocates in Congress and the courts may quell this wave of attacks. But to what end? If such a victory only further politicizes and partisans the issue, the bigger and more important battle — gaining mainstream acceptance and adoption — still needs to be fought.

What we need — for all of our peace of mind — is for the cryptocurrency conversation to rise above politics. Ideally, this would happen naturally because, after all, it is a technology — it should be apolitical. But, sadly, it will depend on the efforts of the cryptocurrency community. There should be a focus on educational efforts, showing real-world use cases, and demonstrating the benefits to humanity of this industry’s approach to decentralized value exchange and data sharing.

We must try to ignore the drama in Washington, not to disengage from the political process, but to figure out how to engage in ways that appeal to both sides.

Part of that is focusing on positive narratives. There is no doubt that in an era of great uncertainty about climate, geopolitical tensions and the intrusion of artificial intelligence into society, there will be a market for such stories on both sides of the political aisle.