Warning: Long Legal Post re Binance vs Coinbase (Patreon)

I respect Matt Levine a lot from Bloomberg - and he wrote a solid piece. 

Here is the TLDR

1. According to Matt Levine's Bloomberg Opinion, a general rule of thumb is that all cryptocurrency exchanges are involved in some form of illegal activity, with some engaging in more serious crimes than others.
2. The US Securities and Exchange Commission (SEC) considers every crypto exchange in the US to be illegal, regardless of whether exchange executives agree or not. Strict adherence to US securities law is necessary for anyone trading cryptocurrency.
3. The most crucial concern for customers should be whether their exchange is stealing their money, as some exchanges have been involved in such activities while others have not.
4. Violation of US securities law is a common thread among all crypto exchanges, but this does not necessarily mean that all exchanges steal their customers' money. It is possible to trade crypto without completely adhering to US securities law, but this decision comes with its own risks.
5. The SEC recently sued Binance, the largest global crypto exchange, and its founder for operating an illegal securities exchange. Coinbase, the biggest US crypto exchange, also faced a similar lawsuit by the SEC.
6. There are two primary reasons why a crypto exchange can get in trouble with the SEC: operating an illegal securities exchange or stealing customer funds. While Binance is accused of both, Coinbase's complaint primarily focuses on its failure to register as a securities exchange.
7. Coinbase, as a crypto exchange, is considered relatively law-abiding. It is a publicly traded US company that complies with regulations, undergoes audits, and prioritizes customer fund safety.
8. On the other hand, Binance, although operating in a similar legal gray area, is known for its opacity, evasion of regulation, and affiliated entities designed to avoid oversight. It has faced legal action by both the SEC and the US Commodity Futures Trading Commission.
9. The SEC's complaint against Binance includes allegations of questionable practices by affiliated market makers and the commingling/diversion of customer assets, indicating potential misconduct beyond simply operating an illegal securities exchange.
10. Despite the similarities in the complaints against Coinbase and Binance, their attitudes towards regulatory compliance differ significantly. Coinbase made efforts to follow the law and implemented frameworks to assess the securities status of listed tokens, while Binance openly acknowledged its illegal operation in the US.
11. Coinbase's cautious approach may work in its favor during legal proceedings, as it can argue that it tried to comply with regulations. Binance, on the other hand, chose to minimize its US exposure and ignored legalities, potentially placing it in a more precarious position.
12. The crucial legal question revolves around whether the crypto tokens listed on exchanges like Binance and Coinbase are securities. While the SEC asserts that most tokens are securities, Coinbase believes otherwise and created committees and frameworks to assess tokens' securities status. The outcome of this legal debate will have significant implications for both exchanges.

Here is the copy 

MATT LEVINE BLOOMBERG OPINION SUMMARIZES WELL: “A decent rule of thumb,” I wrote in March, “is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes.”            Like:

Is your exchange operating an illegal securities exchange in the US? Yes! Yes it is! The view of the US Securities and Exchange Commission, at least, is that every crypto exchange in the US is illegal. You might disagree — plenty of crypto exchange executives disagree, and we will talk more about the arguments below — but realistically, if you are trading crypto, you simply cannot be too squeamish about strict adherence to US securities law.

Is your exchange stealing all of its customers’ money? It might be! Some are! Others are not! This is the one you should mostly care about, if you are a customer.

These things are not especially correlated because, again, every crypto exchange is violating US securities law. “Oooh I shouldn’t trust my money to those guys because they are violating US law”: Sure, yes, a reasonable position that would save you from a lot of crypto disasters, but also one that would prevent you from trading crypto entirely. Your choice!

I am overstating all of this but not by much, man, not by much.

Yesterday the SEC sued Binance, the biggest global crypto exchange, and its founder Changpeng Zhao, for operating an illegal securities exchange. Today the SEC sued Coinbase Inc., the biggest US crypto exchange, for operating an illegal securities exchange.

There are basically two ways for a crypto exchange to get in trouble with the SEC. The good way is that you get in trouble for running an illegal securities exchange. In April, the SEC sued Bittrex Inc. for allegedly operating an illegal securities exchange; any reasonable reading of the Bittrex case made it clear that similar cases were coming against Coinbase and Binance. Just being a crypto exchange in the US is, in the SEC’s eyes, illegal. The bad way is that you get in trouble for stealing all the money. Last December, the SEC sued FTX Trading Ltd., a big crypto exchange. Here is the SEC’s complaint against FTX. I am absolutely certain that the SEC thinks that FTX operated an illegal securities exchange in the US. But that does not even come up in the complaint. There is too much else going on. FTX allegedly stole all the money! When an exchange steals all the money, the SEC focuses on that. When it doesn’t steal all the money, the SEC focuses on the illegal securities exchange stuff.

And so one question about this week’s cases is: Is the SEC suing Coinbase and Binance for being crypto exchanges, or for being bad crypto exchanges? Is the claim here “you let people trade crypto, which we think is illegal,” or is it “you let people trade crypto and steal their money”?

With Coinbase, I think the answer is obvious. Coinbase is, as crypto exchanges go, quite law-abiding. It is a US public company, incorporated in Delaware, listed on the Nasdaq. It went public in a direct listing in 2021, filing extensive disclosures with the SEC. Its financial statements are audited by Deloitte & Touche. Its business model seems to consist of taking money from customers, using the money to buy crypto, and keeping the crypto somewhere safe with the customers’ names on it. I hesitate to make any bold claims about any crypto actors, and I have been wrong before, but it is my impression that Coinbase does not steal the money.

And in fact the SEC’s complaint against Coinbase is very dry and focused entirely on the fact that Coinbase did not register as a securities exchange. Again, in the SEC’s view, every crypto exchange is violating US securities law. But Coinbase is doing so politely and, relatively speaking, harmlessly. Not totally harmlessly — “Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest,” says the SEC — but relatively.

With Binance, the answer is more interesting. Binance is, as crypto exchanges go, sort of an average amount of law-abiding? It is notoriously opaque, headquartered nowhere, a web of confusing entities designed to avoid regulation. (The SEC quotes its chief compliance officer saying, in 2018, “we do not want [Binance].com to be regulated ever.”) Like FTX, it has its own token, called BNB; it has its own affiliated trading firms; it has separate platforms for US customers (Binance.us) and for the rest of the world (Binance.com). It was sued by the US Commodity Futures Trading Commission in March, mostly for letting big US customers (high-frequency market makers like Jane Street and Tower Research) trade on its Binance.com exchange through their offshore affiliates, though there are not zero mentions of terrorist financing in the CFTC complaint. 

And similarly the SEC’s complaint against Binance includes some claims that Binance was doing bad stuff. Binance has some affiliated market makers — firms including Sigma Chain AG and Merit Peak Ltd. that are allegedly controlled by Zhao and that traded on Binance.com and Binance.us — and the SEC hints that they got up to shady stuff:

For example, by 2021, at least $145 million was transferred from BAM Trading [i.e. Binance.us] to a Sigma Chain account, and another $45 million of funds were transferred from BAM Trading’s Trust Company B account to the Sigma Chain account. From this account, Sigma Chain spent $11 million to purchase a yacht.

And:

From at least September 2019 until June 2022, Sigma Chain AG (“Sigma Chain”), a trading firm owned and controlled by Zhao, engaged in wash trading that artificially inflated the trading volume of crypto asset securities on the Binance.US Platform. 

And more generally:

The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain. 

But the SEC does not dwell much on these claims,[1] and for the most part the Binance complaint is the same as the Coinbase complaint: Binance is accused of operating a crypto exchange that was open to US customers and that listed crypto tokens that are securities, without registering as a US securities exchange. I am tempted to read yesterday’s lawsuit as kind of an endorsement of Binance by the SEC. The SEC, and before it the CFTC, investigated Binance carefully and wrote a 136-page complaint about every bad thing it could find, and all it could find is that Binance is running a crypto exchange. 

Still, while the arguments in the two complaints are mostly the same, Coinbase’s and Binance’s attitudes are very different. The key legal question, which we’ll discuss below, is whether the crypto tokens listed on Binance and Coinbase are securities. If they are securities, then probably Coinbase and Binance (and Bittrex and everyone else) are operating illegal securities exchanges; if they are not securities then everything’s fine. Coinbase recognized that this was a potential risk, and set up committees and procedures to ponder and mitigate it. From the SEC’s Coinbase complaint:

Recognizing that at least certain crypto assets were being offered, sold, and otherwise distributed by an identifiable group of persons or promoters, in or around September 2018, Coinbase publicly released the “Coinbase Crypto Asset Framework,” which included a listing application form for crypto asset issuers and promoters seeking to make their crypto assets available on the Coinbase Platform.

Coinbase’s listing application required issuers and promoters to provide information about their crypto assets and blockchain projects. It specifically included requests for information relevant to a Howey analysis of the crypto asset. …

Additionally, in or around September 2019, Coinbase and other crypto asset businesses founded the Crypto Rating Council (“CRC”). The CRC subsequently released a framework for analyzing crypto assets that “distilled a set of yes or no questions which are designed to plainly address each of the four Howey test factors” and assigned to the crypto asset a score ranging from 1 to 5, with a score of 1 indicating that an “asset has few or no characteristics consistent with treatment as an investment contract,” and a score of 5 meaning that an “asset has many characteristics strongly consistent with treatment as a security.” 

In announcing the CRC’s creation, Coinbase stated, “[a]lthough the U.S. Securities and Exchange Commission has issued helpful guidance, whether any given crypto asset is a security ultimately requires a fact-intensive analysis.”

Very responsible, though the SEC disagrees with Coinbase’s conclusions and has quibbles with the process:

Between late 2019 and the end of 2020, Coinbase more than doubled the number of crypto assets available for trading on the Coinbase Platform, and it more than doubled that number again in 2021. During this period, Coinbase made available on the Coinbase Platform crypto assets with high “risk” scores under the CRC framework it had adopted. In other words, to realize exponential growth of the Coinbase Platform and boost its own trading profits, Coinbase made the strategic business decision to add crypto assets to the Coinbase Platform even where it recognized the crypto assets had the characteristics of securities.

Meanwhile here is how Binance’s wonderful chief compliance officer described his fact-intensive analysis of whether Binance listed security tokens in the US:

As Binance’s CCO bluntly admitted to another Binance compliance officer in December 2018, “we are operating as a fking unlicensed securities exchange in the USA bro.” (Emphasis added.)

Just a much clearer perspective! Coinbase hired a lot of lawyers and did a lot of analysis and wrote a lot of checklists to convince itself that it was legally running a crypto exchange in the US. Binance was like “well obviously this is illegal in the US, ah well.” The SEC absolutely agrees with Binance.

This might work out well for Coinbase: It might be able to go to court and portray itself as a good actor who tried to follow the law, while Binance looks like a bad actor who tried to ignore the law; Coinbase might win against the SEC and Binance might lose. But I have to say that, so far, Binance’s approach seems smarter. (Though obviously don’t put it in writing, etc.) Binance noticed that it's illegal to run a crypto exchange in the US, and did it anyway, but minimized and compartmentalized its US exposure: It has relatively few US customers and seems to keep most of its business out of the US. Coinbase went all-in on the possibility of running a legal and regulatorily compliant crypto exchange in the US, and now the SEC has said that that’s impossible. If the SEC is right, what is left for Coinbase?

SEC v. Crypto: What is a security?

Okay let’s discuss the basic theory of the SEC’s case here, which we previously discussed when the SEC sued Bittrex:

If you run an exchange that offers securities trading in the US, you need to register it as a securities exchange with the SEC.

Binance and Coinbase offer trading of crypto tokens that are securities.

They did not register their US exchanges as securities exchanges.[2]

Bad!

Point 1 is a bit more nuanced than that; there are, for instance, stock trading venues that are not registered as securities exchanges, though they are registered with the SEC under other rules. But from the SEC’s perspective the important thing here is that the rules for securities exchanges are designed to protect investors. In particular, they tend to require a separation of three key functions — the exchange that matches buyers and sellers, the broker-dealer that trades on the exchange on behalf of customers, and the clearinghouse that actually moves the money and securities — that are usually combined in crypto. In the stock market, you go to Robinhood’s website to put in an order to buy stock on the New York Stock Exchange,[3] and the Depository Trust Co. keeps custody of the stock and settles the trade. In the crypto market, you go to Coinbase’s website to put in an order to buy crypto on Coinbase, and Coinbase keeps custody of the crypto and settles the trade. 

But the main point here is Point 3: Are crypto tokens securities?[4] The SEC’s basic view is that most crypto tokens — not all of them, not Bitcoin, but most of them — are securities under US law. Coinbase’s view, certainly, is that lots of them aren’t. The particular question at issue here is whether a list of popular crypto tokens — the SEC cites a bunch including Solana’s SOL token, Cardano’s ADA, Polygon’s MATIC, Filecoin’s FIL, Decentraland’s MANA, Algorand’s ALGO, Axie Infinity’s AXS and Voyager Digital’s VGX — that were listed on Binance and/or Coinbase are securities.[5]

The US securities laws define a “security” to include, among other things, any “stock,” “certificate of interest or participation in any profit-sharing agreement,” “preorganization certificate or subscription,” “transferable share, investment contract, [or] voting-trust certificate.” The most general term there is “investment contract,” and the US Supreme Court explained it in a famous 1946 case called SEC v. W.J. Howey Co.:

An investment contract, for purposes of the Securities Act, means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party, it being immaterial whether the shares in the enterprise are evidenced by formal certificates or by nominal interests in the physical assets employed in the enterprise. Such a definition … permits the fulfillment of the statutory purpose of compelling full and fair disclosure relative to the issuance of “the many types of instruments that, in our commercial world, fall within the ordinary concept of a security.” … It embodies a flexible, rather than a static, principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits. …

The investors provide the capital and share in the earnings and profits; the promoters manage, control, and operate the enterprise. It follows that the arrangements whereby the investors' interests are made manifest involve investment contracts, regardless of the legal terminology in which such contracts are clothed. …

The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.

This has become the “Howey test,” and courts ask whether there is (1) an investment of money (2) in a common enterprise (3) with an expectation of profits (4) to come solely from the efforts of others. The SEC has argued, at least since 2017, that most crypto enterprises fit this description.

For instance, consider Solana. Solana is a blockchain that runs crypto applications; its native token is called SOL. Here’s the SEC’s explanation of Solana[6]:

“SOL” is the native token of the Solana blockchain. The Solana blockchain was created by Solana Labs, Inc. (“Solana Labs”), a Delaware corporation headquartered in San Francisco that was founded in 2018 by Anatoly Yakovenko (“Yakovenko”) and Raj Gokal (Solana Labs’ current CEO and COO, respectively). According to Solana’s website, www.solana.com, the Solana blockchain is a network upon which decentralized apps (“dApps”) can be built, and is comprised of a platform that aims to improve blockchain scalability and achieve high transaction speeds by using a combination of consensus mechanisms.

According to Solana’s website, SOL may be “staked” on the Solana blockchain to earn rewards, and a certain infinitesimal amount of SOL must be “burned” to propose a transaction on the Solana blockchain, a common function for native tokens on blockchains that constitutes a method for cryptographically distributed ledgers to avoid a potential bad actor from “spamming” a blockchain by overwhelming it with an infinite number of proposed transactions.

Solana Labs sold SOL tokens to raise money to build the Solana ecosystem:

Solana Labs stated publicly that it would pool the proceeds from its private and public SOL sales in omnibus crypto asset wallets that it controlled, and that it would use those proceeds to fund the development, operations, and marketing efforts with respect to the Solana blockchain in order to attract more users to that blockchain (potentially increasing the demand for, and therefore the value of, SOL itself, given the need for those who wish to interact with the Solana blockchain to tender SOL). For example, in connection with the 2021 private sale of SOL, Solana Labs stated publicly that it would use investor funds to: (i) hire engineers and support staff to help grow Solana’s developer ecosystem; (ii) “accelerate the deployment of market-ready applications focused on onboarding the next billion users into crypto”; (iii) “launch an incubation studio to accelerate the development of decentralized applications and Platforms building on Solana”; and (iv) develop a “venture investing arm” and “trading desk dedicated to the Solana ecosystem.”

The Howey test:

Did investors invest money? Yes, SOL was sold for money, to raise funding to build Solana.[7]

Was there a common enterprise? Yes, Solana is an enterprise; it is a blockchain ecosystem that competes with Ethereum and Cardano and so forth, that tries to attract users.

Is there an expectation of profits? Yes, people bought SOL hoping that it would go up, and it did. 

Do the profits come from the efforts of others? Yes, SOL went up because its promoters and developers built Solana into a popular blockchain, as they said they would, increasing the demand for SOL.

These are often close questions. Most big crypto blockchains are to some extent decentralized; Solana’s growth depends not only on the efforts of Solana Labs but also on the efforts of third-party users and developers who like using it.[8] With some crypto tokens, it is plausible to argue that people buy the tokens not as an investment with an expectation of profits, but rather to pay for transactions on the blockchain; the SOL token is the “gas” that people use to run programs and transactions on the Solana blockchain, and if you buy SOL as a pure “utility token” then it is arguably not a security. Most crypto tokens have both utility and speculative-investment aspects, muddying the analysis a bit.

Also, even if you buy SOL as a speculative investment, it is not clear that you are buying it to share in the profits of the underlying enterprise. Your thought process might be “if I buy SOL, a lot of other people might buy SOL, and its price will go up and I will make money.” That is not really an expectation of profits derived from the “efforts of others”; that’s an expectation of profits derived from speculative mania and online memes. We talked yesterday about Dogecoin, a joke crypto token where everyone pretty ostentatiously promised to do nothing at all to build an ecosystem; people buy Dogecoin because they think other people will buy Dogecoin. I think that that means that Dogecoin is not a security; a purely meaningless token doesn’t involve enough efforts-of-others to qualify.[9] (Surely, e.g., Beanie Babies are not securities.) And surely even when a crypto project does promise efforts and ecosystems and hard-working brilliant developers, a lot of people probably buy the tokens for the same pure number-go-up reasons that they bought Dogecoin. 

But the way that I like to think of crypto and securities is that most crypto tokens are pretty clearly analogues of stock in some underlying tech business. In Solana (and Cardano, Polygon, etc.), the underlying business is a platform business, a blockchain ecosystem for building apps, largely though not exclusively financial-services apps for trading crypto. And everyone who buys the tokens is in some loose sense a quasi-shareholder of the business. And they are rewarded in the same way that traditional shareholders are: with stock buybacks.[10] The crypto term for stock buybacks is “burning”:

Further, Solana Labs markets that it “burns” (or destroys) SOL tokens as part of a “deflationary model.” As Yakovenko explained in an April 14, 2021 article entitled “Solana (SOL): Scaling Crypto to the Masses” posted on gemini.com, “Solana transaction fees are paid in SOL and burnt (or permanently destroyed) as a deflationary mechanism to reduce the total supply and thereby maintain a healthy SOL price.” As explained on the Solana website, since the Solana network was launched, the “Total Current Supply” of SOL “has been reduced by the burning of transaction fees and a planned token reduction event.” This marketed burning of SOL as part of the Solana network’s “deflationary mechanism” has led investors reasonably to view their purchase of SOL as having the potential for profit to the extent there is a built-in mechanism to decrease the supply and therefore increase the price of SOL.

In the Binance complaint, the SEC quotes Changpeng Zhao describing the burning mechanism for Binance’s own BNB token: 

Indeed, on July 9, 2019, Zhao described Binance’s planned BNB burn in an interview posted on YouTube, stating that a “benefit we promised in the Whitepaper is every quarter we will use 20 percent of our profits to buy back [BNB] at the market value … we will buy back and destroy those. We will destroy up to 100 million Binance coins. Basically half of all available coins … Financially that works the same way as a dividend economically.”

I mean I would say it works the same as a stock buyback, but sure, dividends and stock buybacks are essentially equivalent. The point is that shareholders — sorry, tokenholders — in a crypto project share in the profits of that project when it uses some of its revenue to buy back and burn tokens, increasing the value of the remaining tokens, exactly the way a share buyback works.

One way to understand crypto economics is that crypto built a new way to sell stock in promising technology and financial businesses without calling it stock. If you are starting a crypto exchange, for instance, and you want to raise money, you could go to investors and offer them stock in your business. If the business does well, there will be lots of profits (from charging customers trading fees), and you will share them with your investors. But this has problems:

If you sell stock to the public, you will need to register with the SEC.

If you sell stock to big venture capitalists, they will need to register their resales with the SEC, or otherwise find an exemption from SEC registration.

Either way you will probably have to give your investors some sort of financial information about the business to get their money.

Your shareholders might want voting rights, ongoing financial disclosures, etc., which are customary and often mandated by law.

Or, if you are starting a crypto exchange, you can go to investors and offer them tokens in your business. If the business does well, there will be lots of profits (from charging customers trading fees), and you will share them with your investors (by buying and burning tokens). This is very nice:

If you sell tokens to the public, you can say that they are not securities, and not register with the SEC.

If you sell the tokens to big VCS, they can say that they are not securities, and resell them freely.

You will write a white paper to sell the tokens that does not necessarily get into a ton of financial or operational detail.

You can give the tokens whatever rights you want.

I am being a little unfair. I am describing a pure regulatory arbitrage; Binance’s BNB token — or FTX’s FTT token — is a pure substitute for stock, issued by a company to raise money to run its centralized business. Lots of crypto is not quite like this; in some projects there is a real idealism about building decentralized ecosystems that will not be owned by any one company, and selling tokens can be a way to create and fund projects without owners, an economic model that really is very different from a shareholder-owned corporation. But much of the time, the crypto ecosystems seem to be built by pretty centralized teams, and the tokens are sold as more or less stock in a new tech company with a promising idea started by a promising team.

You can see why people in crypto like this! It combines regulatory arbitrage with a certain exciting philosophical newfangledness. You can see why the SEC does not like it! The SEC knows all about “ the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” The SEC is the regulator getting arbitraged. And it is not happy about it.

SEC v. Crypto: What now?

Oh I don’t know. Conceptually, there are several possible outcomes here:

The SEC wins and crypto is more or less banned in the US. You can still buy Bitcoin and probably Ethereum[11] and maybe Dogecoin in the US, because those are not securities, but any other crypto project is probably a security and not going to be offered for trading in the US. Crypto withers and dies and everyone moves on to artificial intelligence. The SEC kills crypto, as a sort of slow-burn revenge for crypto’s attempt to arbitrage around the SEC.

Same, except that crypto develops and flourishes elsewhere, and the US simply misses it. Crypto turns out to be extremely world-changing and valuable, and the US is left behind. Or it turns out to be a weird niche financial product you can trade in Europe but not in the US, like binary options or contracts for differences. Either way it lives on abroad, but not in the US.

The SEC wins, and then somebody — some combination of existing crypto firms, new crypto entrants and legacy financial services firms — finds a path forward for crypto to be traded in the US in compliance with US securities laws. Everyone buckles down and says “okay, Solana is going to start filing annual reports with audited financial statements,” and people will start crypto exchanges that register with the SEC and that are separate from the clearinghouses and brokerages, etc. This seems very hard, because the SEC is quite clearly not interested in accommodating any crypto projects. I am not going to sit here and tell you “here’s how crypto firms can register their tokens as securities.” Certainly Coinbase has been trying forever to figure out how to do it — they have pestered the SEC for rules allowing it, etc. — with, so far, not much luck. But I suppose it’s always possible.[12]

The SEC loses, the courts say “what, no, none of this stuff is a security,” and crypto continues to trade in the US without much securities regulation.

Congress (or a future SEC) steps in to change the rules, saying “well sure all this stuff is technically illegal under existing law, but it is crazy to stifle innovation like this, so we will make new rules to allow for regulated trading of crypto in the US.” 

I don’t know which outcome I would bet on. The last outcome is the one that the crypto industry wants, and there does seem to be some appetite in Congress to write crypto rules.

But I do want to say that the SEC is clearly betting on the first outcome. That is why it is bringing these cases now, after the collapse of FTX and so many other big crypto firms, after crypto prices have fallen, after the venture capitalists have all moved on to AI. These cases, against Binance and Coinbase, are high-risk cases for the SEC: Coinbase and Bitcoin are big well-funded companies with good lawyers and lobbyists, they have the resources and motivation to fight these cases to the end, and they do have decent legal arguments. The SEC might lose! But it is being strategic about maximizing its chances. I wrote in February:

When crypto is popular and exciting and going up, if you are a regulator who says “no, we must stop this,” you look like a killjoy. Investors want to put their money into stuff that is going up, and they are mad at you for stopping them. Politicians like the stuff that is going up, and hold hearings about how you’re stifling innovation. Crypto founders are rich and popular and criticize you on Twitter and get a lot of likes and retweets. Your own regulatory employees, who have an eye on their next private-sector jobs, want to be leaders in crypto innovation rather than just banning everything.

When crypto is going down and so many projects are evaporating in fraud and bankruptcy, you can kind of say “I told you so.” There is just a lot more appetite to regulate, or I guess just to shut everything down. “You are stifling innovation,” the indicted founder of a bankrupt crypto firm can say, but nobody cares. 

That is the bet that the SEC is making. Now we’ll see if it’s right.