The SEC Is Fighting the Last War

The U.S. Securities and Exchange Commission’s (SEC) one-two punch of suits against Binance and Coinbase this week hardly came out of the blue. The question of how to regulate crypto exchanges has been at a high simmer for years, and while the specifics of their approach are eminently debatable, the SEC was bound to go after the big boys sooner rather than later.

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But the messaging surrounding the suits makes the SEC’s recent moves seem reactive, political and frankly, just beneath the bluster, weak. Specifically, the SEC seems to be trying to put Coinbase and Binance into the same bucket as the frauds of 2022, such as Luna, Celsius and above all FTX. The SEC has been widely viewed as giving FTX deferential treatment before it was revealed as a massive fraud, so now it’s demonstrating that it really can be a hard-nosed regulator – it’s just doing so a couple of years late, and to the wrong targets.

Essentially, the SEC wants the public to see the current suits as part of a campaign against fraud. In reality, the suits represent a paternalistic attempt to keep people from making what the SEC views as the wrong kind of investments. That conflation is obviously deeply unfair, both to the companies being targeted – Coinbase especially – and to an American public that looks to the SEC for expertise.

The SEC, like all legislators and regulators, can’t be expected to distinguish between crimes that break the law, and sins that actually harm and exploit people. Regulators enforce codes, not morality itself – but that doesn’t mean such distinctions don’t exist.

The SEC’s core claim in its charges against Coinbase is simply that the exchange “has made calculated business decisions to make crypto assets available for trading in order to increase its own revenues, which are primarily based on trading fees from customers.”

There’s a complex debate to be had about whether Coinbase could have complied with the rules in the way the SEC says it should have. But the substance of the SEC claim here is that Coinbase broke the rules by creating a service that customers (including me) actually used, and then tried to make it better.

Yet the Coinbase charges are being tortuously represented as protecting investors against some manipulative, horrifying predator. SEC director of enforcement Gurbir S. Grewal, in a quote which the SEC has highlighted on social media, alleges that “Coinbase’s calculated decisions allowed it to earn billions … at the expense of investors by depriving them of the protections to which they were entitled.”

Binance, by contrast, does stand accused of a few things that look like genuine sins, particularly price manipulation that harmed customers. But other charges against Binance amount to a denial of its right to provide services that its customers clearly want.

If the protections Grewal wants include standards for reporting and transparency around assets similar to what exists in the stock market, it seems clear both U.S. and global exchanges would welcome such a regime.

But in fact, the SEC appears to think crypto exchanges are exploiting their customers simply by allowing them to do anything so foolish as buying cryptocurrency under their own free will.

‘We don’t need more digital currency.’

The SEC’s suit against Coinbase in particular hinges on the moral presumption that cryptocurrency is inherently fraudulent and valueless. This allows them to paint Coinbase CEO Brian Armstrong as the same as Sam Bankman-Fried in the public eye – despite the fact that the first has run a stable and trustworthy service for a decade, and the second was an incompetent boob with zero moral compass or basic mathematical ability.

SEC Chair Gary Gensler advanced that muddying agenda this morning on CNBC. He first made noises about the SEC’s supposed neutrality on asset quality. But he then launched into a sweeping and frankly boneheaded disquisition against crypto as such, declaring that “we don’t need more digital currency, we have digital currency. It’s called the U.S. dollar. It’s called the euro. It’s called the yen. They’re all digital right now.”

This is not just an embarrassing misrepresentation, but one Gensler must know the truth of. After all, he taught MIT students about blockchains. He can’t possibly actually believe there’s no distinction between the banking rails over which he and the rest of the U.S. government have incredibly oppressive, direct and politicized control, and monetary cryptocurrency networks they don’t and ultimately can’t control.

Gensler appears fully pot committed, in short, to misrepresenting the underlying facts to the public.

An embarrassment of entanglements

This is all best understood in the context of what happened in 2022. In fact, the SEC and other regulators performed pretty admirably in moving against frauds at the top of the crypto bubble. They put productive pressure on both Do Kwon’s Luna and Alex Mashinsky’s Celsius.

But Gary Gensler personally wound up embarrassingly exposed on Sam Bankman-Fried and FTX, above all because Gensler’s staff reportedly had ongoing discussions of crypto regulation with an FTX team. That intimacy may have kept them from seeing the fraud – at least one congressman publicly laid blame for FTX at Gensler’s feet. Though Gensler wasn’t involved, Sam Bankman-Fried’s appearances before Congress increased the impression that the FTX founder had special access to regulators.

Now, while there are legitimate reasons for the SEC’s charges against Binance and Coinbase, it’s hard to escape the sense that they are being framed as a do-over for the SEC’s and Gensler’s FTX missteps. But that doesn’t mean they’re actually the same thing, and misleading the public to that effect may wind up undermining Gensler’s position in the long run.