SEC Policy is Creating a Crypto Disaster
John Barry | Thu Jun 15 2023
The SEC's policy is causing turmoil in the crypto sphere. The cryptocurrency market is increasingly leaning towards decentralized alternatives due to the struggles faced by centralized exchanges (CEXs) in meeting the demands of traders and confronting legal challenges from the U.S. Securities and Exchange Commission (SEC). The SEC filed lawsuits against Binance.US and Coinbase on June 5th and 6th, accusing them of trading unregistered securities.
The recently released Hinman emails show divergent opinions and motivations within the U.S. Government on classifying digital assets. The SEC has been advocating the decades-old "Howey Test" to clarify what constitutes a security in the crypto space. However, the Hinman emails acknowledge gaps in the Howey regulations regarding this. Many voices argue for clearer guidelines, criticizing the mixed messages emanating from the SEC.
Nevertheless, the current SEC chairman, Gary Gensler, maintains that existing regulations are clear, and the SEC has no plans to formulate new rules. In July 2022, Coinbase filed a formal petition urging the SEC to provide guidance to the crypto industry. The SEC has continually delayed its response, and as of June 13th, requested an additional 120 days to respond to the U.S. Court of Appeals for the Third Circuit.
The SEC's stance on security definitions remains ambiguous. They seem focused on regulating law-abiding U.S. CEXs with a proven track record of safeguarding customer funds, while most major CEX scandals involving theft or loss of customer funds originate from offshore CEXs.
In 2016, four leading U.S. cryptocurrency exchanges, Coinbase, Kraken, Bittrex, and Poloniex dominated the market. Today, only Coinbase remains in the top ten globally and may be considering a move to England. Both Bittrex and Poloniex experienced significant declines in trading volume post-2017.
Interestingly, the U.S. Government allowed Sam Bankman Fried (SBF) to own the offshore exchange FTX and the trading firm Alameda Research. As SBF negotiated with the SEC, he moved customer funds deposited on FTX for Alameda to trade. This situation has led to accusations of selective SEC regulation and potential political influence.
CEXs have faced several challenges, including security vulnerabilities due to their centralized structure, which makes them prime targets for hacking attacks. Additionally, accusations of price manipulation and unethical practices have led to a loss of trust among traders. As a result, there's been a decline in the popularity of U.S. CEXs, and traders are exploring more transparent, decentralized alternatives.
As U.S. CEXs continue to falter, expect more offshore CEX hacks, deception, and loss of U.S. customer funds. Despite this, the SEC persists in its claim of investor protection.
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