What’s behind the SEC lawsuits against Coinbase and Binance?

Just one day after suing cryptocurrency trading giant Binance, the Securities and Exchange Commission has sued another company, Coinbase. The crypto exchange is accused of trading cryptocurrencies that the SEC says should be registered as securities. The SEC accused Binance of, among other things, improperly handling customers’ funds and trying to attract U.S. customers who aren’t allowed to trade on the platform.

Both these cases pose a bit of an existential question for a lot of cryptocurrencies.

The beef between the SEC and these crypto exchanges can be boiled down to one basic disagreement: “The SEC believes that many digital assets are securities,” said Jai Massari, a fellow at the Berkeley Center for Law and Business. 

Are cryptocurrencies securities like stocks and bonds? Are they commodities like wheat and oil? Or are they just their own sorta thing? “There isn’t consensus on this topic,” Massari said.

In fact, she said that different federal agencies have different interpretations as they go about trying to protect investors and their savings from risk. But the answer to this question of whether cryptocurrencies are securities makes a big difference. 

“If any of the cryptocurrencies offered by these trading platforms are securities, then the SEC has jurisdiction,” said Massari. “If not, then it does not have jurisdiction.”

But the ripples of these cases go further than that. “It’s going to have material implications for the viability of the cryptocurrency industry,” said Ron Geffner, a partner at Sadis and Goldberg.

Binance may have to completely disengage from the U.S. market, per Jeffrey Blockinger, general counsel for Quadrata Inc.

Coinbase may face a greater threat, he said. “Coinbase, whose principal customer base is American — in theory, this could have a significant negative impact on them and may even cause them to go out of business.”

Coinbase has 108 million customers, according to Reuters, and had $130 billion of crypto assets on its books in March. But beyond the exchanges that trade cryptocurrencies, Blockinger said some cryptocurrencies themselves may not survive being forced to fit neatly into a regulatory framework meant for stocks and bonds and corporations. They don’t have boards of directors or annual reports.

“It’s going to require some work to get these tokens to become issued registered securities and whether or not it’s even possible, I think remains to be seen,” he said.

At a hearing on Tuesday, Dan Gallagher, chief legal compliance officer for Robinhood, was asked if cryptocurrencies that were somehow classified as securities could just be traded like stocks through a broker.

“It’s impossible without regulatory relief and infrastructure changes in securities markets,” he said.

For now, a lot of the regulatory questions around cryptocurrency look like they’re going to get worked out through the courts.