Exploring the conflict between the SEC and major cryptocurrency corporations and the fight for investor protection in digital currency markets.
THOUGHT LEADERS
Bitcoin, Coinbase, Binance and more are all fighting for their lives as the United States Securities and Exchange Commission does everything in its power to eradicate the current cryptocurrency system in the United States and replace it with one it deems more “fair” to the American public.
Since its start in 2009, cryptocurrency, or digital currency, has taken the world by storm and caught the attention of millions of investors who have an interest in digitizing their assets. At first glance, this seems convenient to many, but as SEC chairman Gary Gensler has been arguing, the system is so deeply flawed that the American public doesn’t even realize the risks it is taking.
This argument is not to say that the burden of responsibility is largely on the public and their ability to understand and invest their money wisely, but more so to point out how powerless investors are to crypto exchange platforms. Without change to the very infrastructure of these platforms, there is no hope for a successful and fair digital currency world.
The SEC’s concerns: Investor protection and crypto exchanges
The SEC has found issues with how these large cryptocurrency corporations manage investors’ money. As Gensler argued in his interview with CNBC, the investing public is subject to many security laws that regulate how their money is invested and managed in conventional markets such as the New York Stock Exchange.
Digital currency corporations do not abide by these same regulations, wherein lies the central problem. There is no valid reason or argument for these corporations to be exempt from compliance with such laws, other than the ease it provides to crypto platforms when it comes to reinvesting money. This is to the severe detriment of the investing public, and from the viewpoint of the SEC, needs to be eradicated. The mission of the SEC is to bring these corporations into compliance with these securities, but they are running into problems when it comes to the execution of these goals.
One of the main reasons for the very strong push to bring these corporations into compliance is the misuse of investor funds. Many of these digital currency databases commingle investors’ funds, which creates a huge liability issue that would not be permitted in the conventional investment world.
The New York Stock Exchange would also not be permitted to run a hedge fund since it would be, technically, trading against the general public who has invested in the stock market. People’s investments in the stock market would become inaccessible to them since a hedge fund is capitalizing on high-risk investments with high-return profits above the funding capabilities of the general public.
At its very core, this concept holds zero merit and lacks the logic of a successful investment world — it creates a give-but-no-take system. In the same sense, digital currency services should not be able to take all the funds received from investors, pool them together, and reinvest them in ways they see fit to “maximize profit,” thus creating higher risks than the initial individual investor was willing to take on. This strips investors of control over their own money and puts them in a position where their investments could potentially result in someone else’s substantial gain. There is an obvious discrepancy between what is “legal” in investment and trading, what these digital currency companies are engaging in, and what the public understands about what is truly happening with their monetary investments.
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Gary Gensler leading the SEC’s crypto crackdown
Gensler recognizes these discrepancies, and so he has recently been much more aggressive in leading the SEC to solve the problem. He argues that everything is digital now, so there is no need for more digital currency. All of the “conventional” currency the world uses is able to be digitized through online payment options, ApplePay, and other similar functions. Therefore, he sees no real need for the existence of cryptocurrency in general.
This thought process, combined with all of the aforementioned risks of cryptocurrency, has driven Gensler to his sudden aggressive stance. He always believed the SEC had discretion over the proceedings of cryptocurrency, but his inability to bring this to fruition has seemingly pushed him to an extreme and frustrated perspective.
On June 6, 2023, the SEC sued Coinbase, the second-largest crypto exchange by volume. The SEC claims that Coinbase made billions of dollars off unregistered exchanges and sales of crypto assets by removing and ignoring the necessary protections of individual investors’ funds. It is not just Coinbase where there are problems, however. Binance has been actively advertising itself to the American public while simultaneously evading U.S. law and SEC regulations. Worldwide, these companies are doing everything they can to operate above security laws.
Looking beyond the negativity: The potential for crypto innovation
There is no denying that the tone of the situation up until this point has been negative and, arguably, frightening. However, it is crucial to remember that at its core, cryptocurrency is centered around innovation. These problems exist because we live in an ever-growing, technologically advanced world, and cryptocurrency is one of those new innovations. The creation of cryptocurrencies and the ease with which they can be invested and traded is a huge technological achievement, but the lack of regulations combined with this newfound freedom has become a catalyst for an unmanageable investing world. At this point, the SEC is merely realizing that this innovation has festered beyond its authority, so there is a sudden desperation to try and bring crypto into their sphere of control.
As a result, the U.S. appears to be trapped in a huge game of “catch me if you can,” where the SEC just can’t seem to fully bring crypto agencies into compliance, and the agencies don’t want to enter compliance, since they have been operating without it thus far. These agencies have been extremely successful in marketing themselves as profit-generating machines for small investors, which is what continues to draw people in. Their actions and misuse of funds are not as tangible or visible as they would be if the New York Stock Exchange behaved in the same way, but that does not mean they should go ignored.
The SEC understands the threat these corporations pose to the health of the U.S. investment system if they continue to go unregulated. This is why the SEC is doing everything in its power to strip crypto agencies of their ability to manipulate investors’ funds how they see fit in accordance with zero regulations. The future of cryptocurrency in the U.S. seems grim if this stubborn battle between law and evasion continues, leaving the American public, and the rest of the digital investing world, drowning in the middle.