Crypto is under assault—again.
And once more, the Securities and Exchange Commission is the attacker.
Yesterday, the SEC announced 13 charges against Binance, the world’s largest crypto exchange. Among the litany of accusations, the SEC claims Binance founder Changpeng Zhao—more commonly known as CZ—allowed certain high-value U.S. customers to trade on Binance when they were restricted from doing so.
That plays into another SEC claim that Binance.US is not a separate and independent trading platform from its parent company, Binance, as CZ has long asserted. The parent company is not registered to operate in the U.S., though Binance.US is.
Earlier today, the SEC similarly sued Coinbase, the largest crypto exchange in the U.S., alleging that it violated rules that require it to register as an exchange and be overseen by the federal agency.
As part of its attacks on Binance and Coinbase, the SEC also laid out its view that many cryptocurrencies are securities that fall under its purview, and are not properly registered as such. The list of cryptos that the SEC claims are securities include Solana, Cardano, Matic, The Sandbox, Decentraland, and Binance’s own coin called BNB. (None of the cryptos in the Global Intelligence Portfolio are on the list.)
Because of the SEC’s actions, the crypto market as a whole has suffered another downdraft.
Ethereum was down as much as 5%. Bitcoin, the granddaddy of crypto, was down a bit more than 6%. Solana was off 10.5%. The Sandbox fell more than 16%.
All of them, however, have already shown signs of rebounding. Which is why I’m not immediately concerned by the SEC’s actions. I continue to monitor our crypto investments… and I anticipate they’ll bounce back quickly from this news.
So, let me explain what’s happening… and what it means for crypto.
Why Is the SEC Targeting Crypto?
For much of the past year, the SEC has been taking big swipes at crypto… using arcane laws to punish crypto companies, while refusing the industry’s pleas for clarity on which securities laws apply to it.
This aggressive, antagonistic approach sets the U.S. apart from many other Western economies.
The European Union, in particular, recently approved comprehensive legislation to regulate the crypto industry. This law, called Markets in Crypto Assets (MiCA), is due to come into effect as early as next year.
So, why is the SEC taking this approach?
My theory is that the federal government is fearful of an industry it can’t easily control.
Crypto is rapidly emerging as an alternative to the traditional finance services sector.
Not everyone in America has easy access to a bank account. Not everyone in America has easy access to a brokerage account. But anyone can open up a crypto account because all you need to do is download a crypto wallet to a smartphone or an internet browser.
This makes the federal government nervous. The dollar is a flawed currency that’s weighed down by extreme levels of debt. Moreover, lots of countries around the world—including major non-Western economies like Russia, China, India, and more—are seeking to reduce their use of the dollar.
Any technology that allows money to easily flow out of the dollar is an existential threat to the greenback on some level… and the SEC knows this.
The SEC is the guard dog trying to take a bite out of the crypto intruders to keep the dollar safe.
What Happens Next?
The SEC and its anti-crypto chairman, Gary Gensler, appear to be on shaky ground with their claims against crypto.
For several years now, the agency has been in a legal fight with a crypto project known as Ripple, also called XRP. Like a broken record, the SEC claims XRP is a security and should be registered as such with the commission.
The courts don’t seem inclined to agree with the SEC, based on various rulings that have happened throughout that case. Most recently, the courts struck down the SEC’s effort to keep out of testimony comments by the agency’s former corporate finance director, William Hinman, who once told a conference that “current offers and sales of Ethereum are not securities transactions.”
The SEC’s own staff has also raised questions about the legitimacy of the fight against Ripple. Internal emails have emerged recently in which SEC staffers appear to agree that Ripple does not fall under the so-called Howey Test, a legal precedent established by the Supreme Court in the 1940s that sets out what defines a security.
Even members of Congress think the SEC is out too far over its skis.
So, the broader point here is that, yes, the SEC has attacked crypto yet again… and, yes, this again led to crypto prices falling across the board. But it’s just a hiccup in a hurricane.
Crypto is not going away. It’s already far too ingrained in the economy. Just this week, global financial giant JPMorgan announced plans with six major Indian banks to build a crypto platform that would enable frictionless, interbank settlement of U.S. dollar transactions. Basically, banks would be able to move around vast sums of money, instantaneously, 24/7/365, and at a cost of just pennies.
That’s just a single example of the tens of thousands of efforts now underway by banks and businesses to use blockchain—the secure ledger technology underpinning all crypto—to reduce costs and increase efficiency.
So, the SEC can attack crypto, but that will just push crypto firms to relocate to friendly jurisdictions such as Europe, Australia, and Singapore. Many already have, in fact. There has been a noticeable rise in crypto-focused venture capital money flowing to Europe instead of the U.S. in the wake of the EU crypto legal framework.
My bet is that the SEC will soon have to respond to this outflow by regulating crypto, as the EU has done.
As for the charges against Binance and Coinbase, my expectation is that the companies will end up paying some fines and revamping some internal procedures… and all will go on as normal.
What Should You Be Doing?
As I write this, investors have pulled more than $700 million in crypto assets from Binance, according to data from Nansen.ai.
That’s a large amount, no question. But it’s not outside of historical norms. And Binance reportedly has reserves of more than $8 billion held in stablecoins (cryptos that track an underlying asset, usually the U.S. dollar, on a 1:1 basis).
So, the platform appears to be in a solid financial position.
Large outflows from Coinbase are also possible, though I have yet to see data on this since the SEC announcement on Coinbase was released only a few hours ago. At present, I don’t believe this move by the SEC poses a long-term threat to the platform.
In fact, I believe Coinbase is going to go all out to take on the SEC. This is a fight Coinbase has been looking for because it has long believed the SEC is misreading and abusing decades-old laws.
That said, if you’re a crypto investor with assets on Binance or Coinbase, and you feel uneasy about keeping your assets on those platforms, then I would advise that you send them to Crypto.com, another major crypto exchange. (Crypto.com has a guide on how to do this here.) Of course, there’s no guarantee that Crypto.com will escape the SEC’s attentions, but it has not been targeted yet.
For ultimate security, you could put your holdings on a hardware wallet. These are thumb drive-like devices that temporarily plug into your laptop when you want to transact, but then remain unplugged the rest of the time. That creates a physical gap between your crypto wallet and the internet, which keeps hackers at bay.
Hardware wallets are easy to use. I use the Ledger Nano X. If you want to get one, buy directly from Ledger.com. (You can find their website here.) Never buy a hardware wallet from a third-party site like eBay or any other site. Scammers can open up the packaging, write down the seed phrases for that particular hardware wallet, and then repackage the box to make it look like it was never tampered with.
Ledger has a good tutorial video to demonstrate how you use the wallet. You can view that here. (I gain no benefit from recommending this device to you. I’m merely highlighting the option I use.)
Ultimately, I’m not concerned about this latest crypto market downturn or about the SEC’s moves. (In fact, I’ve taken the opportunity to buy some Coinbase stock at discounted prices… a risky trade, but one I believe will pay off.)
I’ve been around this space since 2017. I’ve seen events like these over and over, and crypto always rebounds from them because investors who understand crypto know this is the technology of tomorrow taking root today.
They understand that, ultimately, the SEC cannot stop an industry that is decentralized, spread across the world, and is welcomed in Europe and elsewhere.
At some point, the SEC will have to get on board by regulating crypto sensibly… or it will be responsible as the U.S. falls dangerously behind the rest of the world in an era-defining technology.
