During the previous summer, Coinbase and Binance, two prominent cryptocurrency exchanges, were slapped with lawsuits by the U.S. Securities and Exchange Commission (SEC). The regulatory body accused them of facilitating the trading of unregistered securities through various cryptocurrencies. Recently, the legal teams of these exchanges confronted the SEC in court, contending that the regulator failed to establish a compelling case classifying those cryptocurrencies as securities.
The unfolding narrative
The cryptocurrency space remains in a state of perpetual motion. While last week revolved around the SEC’s potential approval of spot bitcoin exchange-traded funds (ETFs) and the tumultuous series of events leading to that decision, this week brings us back to the courtroom. The SEC’s Enforcement Division is pressing forward, asserting its ability to argue that cryptocurrencies should be deemed securities.
Why it’s significant
The outcome of the SEC’s legal battles with Coinbase, Binance/Binance.US, and Kraken could significantly shape the trajectory of the U.S. crypto industry. Should federal judges concur that certain digital assets indeed qualify as securities and grant the SEC authority to delineate which ones fall into this category, it would result in imposing new registration and reporting obligations on issuers and trading platforms. Conversely, if judges conclude that the SEC has overstepped its bounds or that tailored legislation from Congress is necessary, a substantial portion of the industry may receive a regulatory green light.
Analyzing the situation
In June 2023, Coinbase and Binance found themselves at the receiving end of SEC lawsuits, with allegations that they listed digital assets like Solana (SOLUSD), Filecoin (FIL), and Axie Infinity (AXS), asserting that these assets were, in reality, unregistered securities.
The industry’s discontent with these legal actions was palpable, despite SEC Chair Gary Gensler signaling the inevitability of such lawsuits. Over the past few months, a multitude of lawmakers, industry lobbyists, and other stakeholders have submitted amicus briefs, urging the courts to side with the defendants’ motions seeking the outright dismissal of these cases.
In anticipation of Wednesday’s Coinbase hearing, Jesse Hamilton provided insights, emphasizing that the core arguments closely mirrored those in the Binance case. While the entire article merits attention, one of the key takeaways is that a dismissal at this stage appears unlikely.
During the hearing, Judge Katherine Polk Failla posed challenging questions but refrained from delivering a ruling thus far.
An SEC attorney contended that the token itself wasn’t a security; rather, it was the transactions associated with it that were scrutinized during the hearing.
Inclement weather in the Washington, D.C. area prompted the postponement of Friday’s hearing for the SEC’s case against Binance to the following Monday.
A distinctively intriguing hearing unfolded before the U.S. Supreme Court, where two parties contested the longstanding precedent known as the Chevron doctrine. This doctrine grants federal regulatory agencies leeway in interpreting federal laws for rulemaking purposes. Following the hearing, SCOTUSblog reported the potential overturning of this precedent.
Michael Passalacqua, an associate with Willkie Farr & Gallagher LLP, highlighted the importance of this case, suggesting that regulatory agencies might be less inclined to interpret ambiguous and often outdated statutes in the absence of the Chevron doctrine. He also noted that this development could spur renewed momentum for crypto legislation in Congress, as lawmakers may be incentivized to enact new laws to regulate the industry instead of deferring to agency interpretations.