This Is What the Government Strangling Crypto Looks Like

Another day, another crackdown from the federal government on the cryptocurrency industry. After the Securities and Exchange Commission filed its devastating 13-charge lawsuit against Binance and its CEO on Monday, it kicked off Tuesday morning with a suit against Coinbase,
Three stacks of coins seen in front of a screen displaying the Coinbase logo.

Justin Sullivan/Getty Images

Another day, another crackdown from the federal government on the cryptocurrency industry. After the Securities and Exchange Commission filed its devastating 13-charge lawsuit against Binance and its CEO on Monday, it kicked off Tuesday morning with a suit against Coinbase, the biggest crypto exchange in the United States, accusing it of participating in the securities market without proper registration. As was the case with Binance—the world’s largest crypto exchange by trading volume—the legal issues facing Coinbase had been a long time coming. Last year, a disgruntled user filed a class-action suit against the company over its customer-account protection standards, and a couple of former Coinbase employees were also booked for insider trading. In January, New York state’s financial regulators slapped a $100 million fine on the exchange for neglecting anti-money-laundering laws. More recently, the SEC sent Coinbase a Wells notice in March, announcing its intent to sue the firm for flouting long-standing securities regulations. Now, the feds have followed through with five charges: against Coinbase itself, for acting as a securities exchange, as a broker, as a clearing agency, and as an interstate securities trader without federal registration, and against Coinbase’s parent company, Coinbase Global, for overseeing the firm’s alleged lawbreaking.

Not that it’s just the SEC, which Coinbase executives perceive as a nemesis. Also on Tuesday, 10 state-level securities regulators filed a joint order against Coinbase and Coinbase Global, giving the exchange “28 days to show cause why they should not be directed to cease and desist from selling unregistered securities” in the relevant states (Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin). Basically, if Coinbase can’t prove to these agencies that digital currencies are not in fact investment contracts—and, thus, constitute a form of financial security just like a stock or bond—and it wishes to keep pursuing business as usual, it will have to exit those markets. That would be another huge blow, not least because, per Coinbase’s own research, five of those states make for crypto’s (and Coinbase’s) biggest consumer markets. Also on Tuesday, Coinbase chief legal officer Paul Singh Grewal testified in front of the House Agriculture Committee on “the future of digital assets” as well as a pending Republican-backed bill that, if passed, would allow certain digital currencies to be defined as commodities instead of securities, thus exempting them from SEC oversight. (Coinbase is in favor of the legislation, which would impose a regulatory framework on certain digital coins that would be more akin to that which governs commodity crops—hence the Ag Committee setting.)

Obviously, Coinbase’s stock plummeted on the news that the SEC had sued. But the impact of the Coinbase and Binance actions will be felt across the entire cryptocurrency ecosystem—especially now that the SEC is asking for an emergency order to freeze Binance.US assets all over the world. With the two lawsuits, the SEC has effectively said that the free-for-all era of crypto trading is over. Coinbase CEO Brian Armstrong nodded to the gravity of the moment even as he tried to downplay the news, tweeting on Tuesday that “the complaint filed against us is exclusively focused on what is or is not a security” and that “we’re proud to represent the industry in court to finally get some clarity around crypto rules.”

How important is all of this, really? Quite. As Dirty Bubble Media—the Substack that called out legal improprieties in crypto companies like FTX and Binance long before the government closed in—noted back in March, Coinbase’s bottom line depends in significant part on taking out transaction fees from trades in digital assets other than Bitcoin (which is legally classified as a commodity, thanks to its stand-alone ecosystem and frequent use as a store of monetary value). A formal classification of those non-Bitcoin currencies—i.e., coins mined through open “proof of stake” mechanisms as opposed to Bitcoin’s rigid “proof of work” model—as financial securities would thus be ruinous to Coinbase’s core business model, for various reasons.

The SEC’s five new charges against Coinbase mainly concern the fact that, like Binance, its corporate structure “merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies.” Should the SEC prevail in court (its filing requests a jury trial in the U.S. District Court for the Southern District of New York, which is also litigating the upcoming trial of Sam Bankman-Fried), Coinbase’s entire business model would likely lie in shambles. The broker services (including Coinbase Prime, which the company once touted as a “full-service prime brokerage platform,” per the SEC) would have to split off into their own corporate entities, apart from Coinbase’s clearing services (its branded virtual wallets for customers, plus its accounting for customer transactions in the company books), and apart from the company’s famed exchange programs, where global users can come together to track and trade their coins. Coinbase could no longer operate at its current size and market cap, and would have to ensure that all those services are delineated within distinct corporate entities. That would prevent any future crypto company from reaching a similar scale; no more Olympic-size crypto empires like FTX and Binance and Kraken.

Certainly, future crypto firms might not be able to accumulate such huge stacks of capital if most of their products are determined to be securities. If all crypto businesses that traffic in non-Bitcoin digital assets are made to comply with long-standing securities law, they would have to bring a lot of their practices under formal government registration and oversight. This means “initial coin offerings” for fundraising would need to be reported like initial public offerings, that digital currencies would become less attractive investments because they’d no longer generate special financial rewards for users, that popular coins like Solana could no longer rely on “staking” mechanisms that would offer investors what basically amounts to stock options, that the financial worth of assets like ETH could no longer be linked to the use of their associated projects (e.g., the broader Ethereum network or a branded autonomous organization)—and, most importantly, that fewer investors would be likely to flock to those coins, thus driving down their value, thus making them even less attractive, thus tanking their value …

You get the idea: The “Wild West” in which crypto ran rampant over the past few years would be tamed, and the fundamental reasons for getting into crypto would dissipate. Where would that take us? Perhaps back to the days before the great Bitcoin-vs.-crypto split of 2017, when Bitcoin was the primary game in town for digital currency, and there were no ads from celebrities hyping things like pixelated ape JPEGs and crypto ATMs and metaverse land deeds. Not that any of those have been flourishing since FTX’s great November crash—but they definitely won’t be poised for a comeback should the SEC gets its way. (Notably, the Coinbase case does not say anything regarding how to govern fiat money–backed “stablecoins” often used on the exchange, as Fortune’s Leo Schwartz points out; however, the inclusion of associated stablecoins in the Binance case could fill in that gap.)

Still, all this is contingent on what comes next. Now that three of the world’s biggest, most influential crypto enterprises—FTX, Binance, and Coinbase—are in deep legal doo-doo, everything hinges on how the courts and interested parties respond. If the U.S. district courts for the District of Columbia and the Southern District of New York rule in favor of the SEC against Binance and Coinbase, respectively, the last hope for the crypto economy as we know it would be to pursue its case to the Supreme Court, whose ultimate view of crypto would be anyone’s guess. (There are signs it could be amenable to constraining the scope of securities laws, however.) That, or the House passes the aforementioned bill classifying more digital assets as commodities—which likely wouldn’t get through either the Democratic-controlled Senate or President Joe Biden’s desk, considering that it’s his SEC chair who’s bringing all this crypto heat.

Perhaps anything could happen. But after today’s news, all those laser eyes on the internet are probably gazing downward.