It’s like the endings in The Godfather series: Every movie concludes with a calm Michael Corleone at a social event interspliced with scenes of simultaneously scheduled assassinations of the enemies he had made throughout the film.
This week, the U.S. Securities and Exchange Commission set out to do just that by suing the allegedly errant cryptocurrency exchanges Binance and Coinbase Global Inc. – the No. 1 in the world and the No. 1 in the United States, respectively.
While the legal actions were separate, the SEC’s announcements – one day after each other, not including the third announcement on Tuesday seeking to seize Binance’s U.S. assets – seem orchestrated for maximum impact. Like Mr. Corleone says in the first Godfather movie: “Today I settle all family business.”
The first shot has been fired in what is possibly cryptoland’s highest-stakes battle, and until that is over, the path for Binance and Coinbase will be bitter and hard.
The SEC is accusing the exchanges of a litany of violations, including operating without proper registration and the illegal sale of securities. Binance, in particular, has irked the regulator more: It faces 13 charges, with chief executive officer Changpeng Zhao, a Canadian, being personally charged.
These charges, which the companies deny, are the culmination of years of what critics would call crypto’s Wild West lawlessness.
Coinbase has openly taunted the SEC several times, accusing it of not being upfront with companies on what is permissible or not, and only seeking to punish them after they act.
“Some really sketchy behavior coming out of the SEC recently,” Coinbase CEO Brian Armstrong tweeted in 2021.
Meanwhile, Binance, initially based in China, has hopped from jurisdiction to jurisdiction as governments bore down on it, ultimately declaring that it had “no headquarters.”
The broad strokes of the SEC accusations, while unproven, have been floating around for years: that Binance’s U.S. arm, meant to be a separate entity to conform to strict domestic laws, was a mere façade that actually helped the broader Binance skirt those regulations.
And for the SEC, this is the moment it has been waiting for.
The regulator’s current chair, Gary Gensler, had come into his role with an almost vigilante-like vigour. At every public appearance, he showed more and more of his ambitions: to stake a firm claim on this lawless land, and set up the SEC as the default gatekeeper and policeman. Such motivations are not to be trifled with.
Moreover, the SEC doesn’t need to win in court to win this battle.
Look at how the markets reacted to the lawsuits. Bitcoin fell 4 per cent and then regained all that it lost – a definitive yawner – but Coinbase stock was down 12 per cent on the news, and it is still down 8 per cent from prelawsuit.
While Binance is privately held, it is swayed by public sentiment in a different way – one Coinbase also shares: user withdrawals. The enforcement action shook users’ confidence in the platforms. On news of the SEC lawsuit, users withdrew US$500-million worth of crypto in a day from Binance and US$600-million worth from Coinbase.
Remember what happened when users withdrew crypto en masse from other crypto platforms? The most infamous example is probably the Bahamas-based FTX and its founder, Sam Bankman-Fried. When mass withdrawals reach critical mass, it overwhelms the platform’s ability to honour them, and the whole thing collapses. It’s the scariest term in finance: a bank run.
It’s not specifically a crypto problem, of course. Right after it happened to crypto, we saw it this year in the mainstream finance world with Silicon Valley Bank. But because these bank runs have happened so often in recent memory, trust in platforms is at an all-time low. Customers are jittery.
And crypto platforms have a feature that banks do not: Transactions are public, and everyone can see the coins drained from platforms in real time.
It will not take much to trigger another bank run at Binance or Coinbase. This is especially so when an SEC lawsuit is expensive. In 2020, the SEC sued Ripple, the company behind the XRP cryptocurrency. Three years later, Ripple has spent US$200-million in legal fees, and it still isn’t over.
Regardless of what happens in court, the process is itself the punishment, and some part of the SEC must know that. How the cases of Binance and Coinbase resolve will define the crypto industry for years to come.