The Securities and Exchange Commission’s case against Coinbase is built around a refrain common in its efforts to regulate the industry: while crypto companies operate like any other financial institution they aren’t following the decades-old rules that guide them.
But crypto founders have sounded an increasingly defiant response — that those antiquated rules shouldn’t apply to them in the first place and that it is the regulators who are the problem.
”If you have to pick a fight with everyone, maybe you are the one at fault,” Binance’s billionaire chief, Changpeng Zhao, wrote on Twitter on Tuesday in response to the SEC’s case against Coinbase, just a day after he was sued by the agency on similar grounds when it comes to what is or is not a security.
Coinbase has said it has asked the SEC to provide “reasonable crypto rules for Americans,” but that agency has replied with lawsuits and enforcement actions.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Paul Grewal, Coinbase’s chief legal officer, said in a statement in response to the SEC suit.
Coinbase has echoed statements from other crypto companies that the push to regulate the industry will undermine the U.S.’ position as a hub for financial innovation.
“By enforcing restrictive policies, the U.S. is inadvertently driving crypto-innovation offshore. That shift will compromise America’s legacy of pioneering technological advancements, and weaken our national security posture,” Coinbase’s chief executive, Brian Armstrong, wrote in an opinion piece for MarketWatch just last week.
On Tuesday, Armstrong added: “Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”
The SEC says that it has been clear to the crypto industry about the rules they need to follow, but that they have simply ignored them, leading to the need for legal action.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” said Gurbir Grewal, head of the SEC’s enforcement division. “Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them.”
The suit filed Tuesday alleges that Coinbase had operated as an exchange, broker, and clearing agency for cryptocurrencies since 2019 but had never registered with the SEC as required of all financial institutions by law. It also alleged that Coinbase failed to register the sale of securities related to certain products it offered.
“While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled,” Grewal added.
On Monday, the SEC filed a suit alleging that Binance and Zhao had similarly engaged in the sale of unregistered securities and had also illegally commingled customer deposits and used them to manipulate crypto prices as well as creating a sham U.S. trading arm to side-step SEC rules. The company denied the charges and argued that the agency was overreaching.
“The Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology,” the company said in a blog post.
Some in the industry say that being sued by the SEC is becoming a kind of badge of honor.
“Being sued by the SEC used to mean you probably did something wrong. Now it means you’re probably doing something right,” said Cameron Winklevoss, whose crypto company Gemini was sued by the SEC in January for the unregistered sale of securities. Gemini has moved to dismiss the SEC’s complaint.
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