The SEC’s 7 Biggest Hypocrisies in the Coinbase and Binance Lawsuits
SEC Chair Gary Gensler is making some embarrassingly contradictory arguments
By: Zack Abrams
June 8, 2023
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On Monday, Securities and Exchange Commission Chair Gary Gensler’s shoe finally dropped on crypto as his agency sued Binance and its kingpin, CZ, over a “blatant disregard” of federal securities laws.
Less than 24 hours later, Gensler’s other shoe dropped when he hit Coinbase with a separate lawsuit. (I imagine Gensler burns through a lot of shoes — he has run more than ten marathons.)
The SEC’s lawsuits brought forward some damning allegations, but once again drew the ire of the crypto industry for his agency’s preferred method of rulemaking. Mainly, why defer on clarifying anything in crypto unless it’s in a lawsuit?
Of course, Coinbase and Binance aren’t completely blameless, either. The latter allegedly employed crafty methods of evading law enforcement under CZ’s leadership as it rose to become the world’s biggest crypto exchange. But, after looking at the facts of the case, there are several instances in which Gensler contradicts the guidance of other agencies, the SEC before he joined, and even statements he made himself.
Here’s our roundup of the seven biggest hypocrisies in the SEC’s new lawsuits.
1. Unclear guidance around which crypto assets are securities
In order for Gensler’s SEC to defend its jurisdiction over a crypto asset, it must first establish an asset is, in fact, a security. (Hence the “Securities” in “Securities Exchange Commission.”)
But while Gensler often claims that crypto markets suffer from a lack of compliance to his rules – not a lack of clarity around the rules – he’s refused to clarify certain questions, like whether or not Ethereum is a security, even when hauled in front of Congress.
2. Contradicting the CFTC
The Commodity Futures Trading Commission was the first to sue Binance back in late March. In that lawsuit, the CFTC deemed certain coins commodities, including Binance’s stablecoin BUSD, in order to establish its jurisdiction over the company.
In the SEC’s lawsuit against Binance, BUSD is brought up again, but this lawsuit deems the stablecoin a security, directly contradicting its fellow agency. If that’s not a lack of clarity, what is? Perhaps this is why Congress is making more direct demands for a bill to finally figure out the right way to police digital assets.
3. Gensler himself promoted Algorand, which the SEC just deemed a security
The cryptocurrency Algorand was noted as part of the “non-exhaustive” list of twelve tokens considered securities as part of the Binance lawsuit. But if Gensler wants to bring the hammer down on anyone promoting unlicensed securities, perhaps he should start close to home.
Speaking at a Massachusetts Institute of Technology “Fintech Beyond Crisis” conference held on April 25, 2019, Gensler sang the praises of Algorand's great technology.
4. The SEC signed off on Coinbase going public back in 2019, then sued it years later
Despite the fact that the SEC’s lawsuit claims Coinbase has been operating as an unlicensed exchange since at least 2019, the agency approved Coinbase’s request to list its shares on the Nasdaq stock exchange in 2021, under Gensler’s predecessor.
Some analysts have noted that the SEC has allowed firms to go public even if there are legal issues with its sector (like marijuana, which is still illegal at the federal level) as it’s not the agency’s job to determine if a company’s underlying business is legal or not.
However, Coinbase’s lawyers argued in their response to the SEC’s Wells Notice (a formal notice the agency sends you if they’re about to sue you) that the SEC is the very agency that could make that determination, stating, “Securities law is the SEC’s core competency... If the Commission had believed in April 2021 that Coinbase’s core businesses violated securities law, it would have been required by its own mandate to prevent the S-1 from becoming effective to protect the investing public.”
Coinbase’s stock dropped about 12% immediately following the announcement of the lawsuit.
5. One of Coinbase’s customers is the U.S. Government
Following the government’s seizure of 50,000 BTC, currently worth about $1.3 billion, from Bitcoin thief James Zhong, the government sold 10,000 BTC on Coinbase this March, according to a court filing, and will sell the rest in four installments over the coming calendar year.
Blockchain data shows that this transaction happened on Coinbase, with the government paying over $215,000 in transaction fees.
As concerned as the SEC is about Coinbase “collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails,” you’d think they’d find a different exchange. But maybe that's just me.
6. The SEC has refused to answer Coinbase’s petition for clarity
Back in July 2022, Coinbase filed a public petition with the SEC asking for more clarity around digital asset regulation. The SEC failed to respond.
Then, after Coinbase was served with a Wells Notice in April, they asked a federal court judge to force the SEC to respond. Still, crickets.
Coinbase’s top lawyer has argued that the SEC’s silence is deliberate, tweeting, "If the SEC's answer to our petition for rulemaking is ‘no,’ then they are required by law to tell us, because we have the legal right to question that ‘no’ in court."
Just yesterday, a judge for the U.S. Court of Appeals found Coinbase’s case sympathetic and ordered the SEC to respond to its petition within seven days, in what may be a tacit disagreement with Gensler’s repeated insistence that he has provided all the regulatory clarity crypto companies should need.
7. Gensler doesn’t seem to understand why people might want to use crypto
This week, in an interview on CNBC, Gensler even expressed confusion as to why crypto exists in the first place.
“We don't need more digital currency, we have digital currency. It's called the US dollar. It’s called the Yen. It’s called the Euro,” he said. But in order to move those digital dollars between banks, a wire or ACH transfer is generally used. And wire transfers can take several days to process domestically, and aren’t processed on weekends or holidays. International wire transfers can take even longer — and result in higher fees.
Meanwhile, some cryptocurrencies finalize transactions in mere milliseconds and cost a fraction of a penny. And blockchains don’t take weekends and holidays off.
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