Binance and Coinbase have been drawn into a regulatory turf war

That two different exchanges could be sanctioned by two different regulators for alleged violations of completely different regulatory regimes shows the growing complexity of the operating environment for crypto firms in the US, as a turf war between the SEC and CFTC escalates. Following the dramatic collapse of FTX in November 2022, both regulators have adopted a more aggressive – even hostile – approach to the crypto industry, using enforcement actions to assert jurisdiction.

“If people wondered what the attitude was like at the beginning of the year, now they know it’s hostile,” says Mick Mulvaney, a former White House chief of staff and adviser to crypto-compliance platform Astra Protocol. “I don’t think FTX was the cause, so much as the excuse.”

Since the beginning of the year, the SEC has initiated a number of cases against crypto companies and individuals in the United States. In January, the regulator charged crypto exchange Gemini and crypto lender Genesis Global Capital for a service that allowed US customers to earn interest on their tokens, which the agency alleged was an unregistered securities offering. In a Twitter thread, Gemini co-founder Tyler Winklevoss called the charges “a manufactured parking ticket.” Neither Gemini nor Genesis responded to requests for comment.

In February, the regulator reached a settlement with another exchange, Kraken, which agreed to stop a service that allowed US customers to earn rewards for locking their crypto. The regulator also gave crypto firm Paxos a warning of intent to sue over its BUSD stablecoin, which the SEC claims is a security. In a statement, Paxos wrote that it “categorically disagrees with the SEC.”

Then in March, the SEC accused Justin Sun, founder of the TRON blockchain, of market manipulation, as well as eight celebrities — including the likes of Lindsay Lohan and Ne-Yo — of “illegally declaring” Sun-related tokens without disclosing that they were paid for to do it. Sun did not respond to a request for comment.

Mulvaney says he believes the agency is “adding muscle” with enforcement efforts as a way to strengthen its claim over the industry, but in doing so has lost its impartiality.

Even within the SEC, there is disagreement about how the agency handles crypto. Hester Peirce, one of five SEC commissioners, has dissented publicly against several crypto-related actions, in an effort, she says, to promote discussion and heal the “dysfunctional” relationship between the agency and the crypto industry.

“We have not done our job as a regulator. We have not provided a path to compliance, and have instead taken enforcement action after the fact, says Peirce. Although the agency’s actions are motivated by a desire to protect investors, “the strategy is one of jurisdictional maximization,” she says. “And one way to plant a flag is to initiate enforcement.”

SEC Chairman Gary Gensler’s office did not respond to a request for comment.

The SEC’s move against the industry has been met by a refusal by the CFTC to grant jurisdiction. The agency’s lawsuit against Binance — by far the world’s largest crypto exchange, which until now has been largely beyond the reach of U.S. regulators — specifically refers to popular cryptocurrencies, including bitcoin, ether and litecoin, as commodities.

The CFTC did not respond to a request for an interview, but in a statement announcing the lawsuit, Rostin Benham, CFTC chairman, set the stage for further action against crypto firms. “This should be a warning to everyone in the digital asset world that the CFTC will not tolerate willful avoidance of US law,” he wrote.

In a blog post responding to the CFTC lawsuit, Zhao said Binance “does not agree with the characterization of many of the issues alleged in the complaint.” He also described the lawsuit as “disappointing,” especially because Binance had “worked in cooperation” with the CFTC. Binance declined to respond to further questions about the lawsuit.

In the absence of clear guidance from Congress on whether the SEC or CFTC should consider regulating the industry, crypto companies must do what they can to anticipate possible complaints from both directions. But this is made difficult by the lack of crypto-specific guidelines from both agencies.

“It’s like driving down the road, with no signs or lanes, trying to figure out the rules based on who gets pulled over,” says Dave Siemer, CEO of Los Angeles-based crypto investment firm Wave Digital Assets. “You’re just guessing.”

Crypto companies say they are particularly frustrated by the regulatory onslaught because they have tried to engage with the SEC and CFTC, asking for clearer and more comprehensive rules of the road.

Speaking to WIRED, Paul Grewal, Coinbase’s general counsel, claims that the company’s interactions with the SEC have been more akin to “one-sided monologues” than dialogues. Attempts to help map the parts of the crypto industry that don’t fit within existing regulatory structures, he says, have largely met with no response.

“Coinbase is not asking for special treatment. We want to be registered and held to strict standards, says Grewal. “But the SEC has flatly refused to promulgate substantive rules, instead relying on a regime of regulation by enforcement.”

Gensler has urged crypto firms to register with the SEC, a process that would theoretically minimize the chances of retrospective legal action by ensuring they operate in accordance with the regulator’s expectations from the start. But the idea that registration is as simple as filling out an online form has raised tensions; Grewal says this characterization of the registration process is “simply not true” and that the few companies that have tried to register have “completely failed.”

If a company’s application is rejected by the SEC, it cannot offer securities-related services in the United States, at least in the form described in the application. Because of confusion over the classification of cryptoassets, this eventuality could pose an “existential threat,” says Siemer. “To enter and register means to cease to exist,” he says. “There are no frames; there is no way.”

The question of what crypto is can be resolved in the courts. An ongoing case between the SEC and cross-border payments company Ripple over cryptocurrency XRP, for example, is expected to clarify whether cryptocurrencies should be treated as securities (and regulated by the SEC) or not. After two years, a verdict is approaching in the case, but because it is taking place in a district court, it will not establish a binding precedent. However, a win for the SEC would strengthen the case to become the de facto crypto regulator.

People in the industry say a better solution would be for the US Congress to put in place comprehensive legislation regulating crypto. The European Union is on track to introduce broad-based crypto legislation in 2024, under the Markets in Crypto Act (MiCA), and countries such as Japan and the UAE have also moved quickly, but the US is lagging behind. A number of crypto-related bills were introduced in the 177th Congress, but died when the last session ended in December, and thus must be formally reintroduced and debated again.

Mulvaney, who spent six years in the House of Representatives, says anything resembling comprehensive crypto legislation is unlikely to make it through Congress this year, ahead of the 2024 presidential election. But the most important thing, he says, is that crypto is “bipartisan” — it appeals to libertarian beliefs on both sides of the political divide — meaning that the issue of legislation will not be decided along “tribal lines.”

“It’s tough to operate without regulation, because you don’t know what you are,” says Mulvaney. “You don’t want to be over-regulated … but you need enough to provide guidance and clarity. That’s the sweet spot.”

In some parts of the crypto community, regulators’ refusal to set clear lines has been interpreted as a deliberate attempt to push the industry out of the United States.

Regardless of the intention, the consequence of continued ambiguity over the classification of cryptoassets, the responsible regulator and the process of registering services with the authorities is likely to be an exodus of crypto businesses from the country, say Mulvaney and Siemer.

In late March, Circle Internet Financial, issuer of the USDC stablecoin, announced plans to establish a European headquarters in Paris. According to a Bloomberg report, Coinbase is also planning an offshore version of its trading platform. Grewal declined to confirm, but says the company is “paying close attention to the growth of markets outside the US.”

A similar pattern is playing out among smaller crypto firms. Wave Digital Assets is preparing its own contingency plan, says Siemer. Although the company is not yet considering exiting the US, it has halted hiring in the country due to concerns about the regulatory climate.

Peirce, the SEC commissioner, says the agency’s goal is to help enable safe experimentation with technology, not push the crypto industry offshore. But she is sympathetic to the interpretation. “If you’re trying to send the message that you want crypto in the US, but you want it to be compliant, the way to send that message is to help companies [to become compliant]. But we don’t see that happening, she says.

“You don’t fix the situation by saying ‘come in and register’ – because no one knows what that means – but by bringing everyone into a room and having a conversation like adults.”