US regulators push crypto to the brink

The cryptocurrency sector is facing an existential crisis courtesy of Uncle Sam.

Driving the news: The Securities and Exchange Commission (SEC) set the stage for a high-stakes showdown with the biggest players in crypto last week, filing lawsuits against Binance and Coinbase, the largest crypto exchanges in the world and the US, respectively.

  • The lawsuits rest on the SEC’s view that nearly all crypto assets (though not Bitcoin, and maybe not Ethereum) are securities, which is a tightly-regulated type of financial instrument.
  • If you want to run an exchange where Americans can trade securities, you need to register with the SEC and comply with a mountain of regulations—neither Coinbase nor Binance did this, and the SEC is now coming after them for it.

Why it matters: Coinbase and Binance are like the final-level video game bosses for the crypto-hostile SEC—if they can defeat them in court, it’s effectively game over for crypto in the US market.

  • It’s a stunning fall for a sector that was, until just last year, attracting billions in funding from the most prestigious financial institutions and spending nearly as much on everything from Super Bowl ads to naming rights for arenas.

Why it’s happening: The implosion of a number of high-profile crypto businesses—capped by the collapse of FTX—undermined the industry’s defenders and gave regulators (who have long been skeptical of crypto) the opportunity to crack down. 

  • Respected voices in politics, business and academia joined the pile-on, greatly diminishing any prospect of new laws that would legitimize the sector (at least for the foreseeable future).
  • “Rather than creating a new legal and regulatory framework that legitimizes crypto, we should simply let it burn,” wrote business professors Stephen Cecchetti and Kim Schoenholtz in one widely-circulated Financial Times column.

Bottom line: The SEC doesn’t just want to let crypto burn—it wants to finish it off itself.