SEC’s crackdown on Binance and Coinbase unlikely to impact traders near-term but could transform crypto

The Securities and Exchange Commission’s back-to-back lawsuits this week against cryptocurrency exchanges Binance and Coinbase mark a new phase in long-running government efforts to rein in the industry. But the crackdown won’t change much for crypto investors in the near term, analysts say.

The SEC’s suits are looking to force the two largest platforms for cryptocurrency trading to register with federal regulators, alleging that the companies have each violated a series of existing securities laws. By targeting Binance, the world’s largest crypto exchange, and Coinbase, the second largest, the agency is taking its biggest step yet to tighten controls on an industry that has largely operated outside the traditional financial system.

The commission’s moves are the latest in a multiyear effort to erect new guardrails, but crypto exchanges such as Binance and Coinbase will likely continue to operate relatively uninterrupted while the civil litigation moves through the court system, PitchBook crypto analyst Robert Le said.

“In the short term, I don’t see any changes,” Le said, referring to the next three to five years. He cited XRP, a digital coin that continues to trade despite the SEC’s ongoing lawsuit against blockchain company Ripple Labs, announced in late 2020.

The SEC charged Binance on Monday, followed by Coinbase on Tuesday. The agency’s complaint against Binance, which also included its founder, Changpeng Zhao, further alleges that the exchange “misled” Binance users about how the platform was using their funds, including by allegedly funneling customer assets into entities owned and controlled by Zhao.

Both companies have pushed back on the SEC’s allegations.

So far, the lawsuits don’t appear to have spooked crypto investors much. Bitcoin, the most-traded cryptocurrency, dropped sharply on Monday but jumped back up on Tuesday to trade at around $27,000 — significantly higher than where it traded late last year in a broader industry decline that has come to be known as “crypto winter.”

Still, the SEC’s actions are “sending a loud and clear message to the public: ‘buyer beware,’” said Better Markets President Dennis Kelleher, whose advocacy group has called for more stringent regulations on the crypto industry.

The cases extend beyond the two exchanges themselves. By targeting the marketplaces where trades are brokered and cleared, the agency is taking aim at the cryptocurrency industry’s critical infrastructure, an unwelcome development for pro-crypto groups like the Blockchain Association.

“Contrary to what [SEC Chairman Gary Gensler] says, there is no regulatory clarity for digital assets,” the association’s CEO, Kristin Smith, said in a statement Tuesday. She pointed to two regulatory proposals in the House of Representatives, as Congress continues to debate a federal framework for regulation.

While the commission’s litigation will take time and could ultimately fail, the actions this week could eventually put many tokens offered on crypto exchanges in jeopardy as well.

Looking ahead, if the SEC moves to more clearly identify which token offerings on cryptocurrency exchanges it considers securities, the exchanges may have to delist them while they go through the registration process — which could significantly disrupt trading activity, Le said.

“Any of those specific tokens will be hurt,” he said.

SEC Chair Gary Gensler has signaled he would be comfortable with fewer cryptocurrencies.

“Look, we don’t need more digital currency,” he told CNBC on Tuesday, after announcing the action against Coinbase. 

Le said this week’s headlines might spook some casual investors from more actively trading cryptocurrencies, but he said there’s reason for optimism, too. After a rough year for the industry — from the meltdown of FTX and criminal case against its founder to the crash of crypto-heavy Silvergate Bank — an effective effort to bring more regulation to the two largest exchanges should build more credibility in the long run.

“If they’re the first to register, a lot of retail traders will feel safer and leave the long tail of unregistered exchanges,” Le said.