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SEC lawsuit sees Binance.US wobble, trading platforms delist cryptos

BNB tokens and SEC logo, Ripple and ex-SEC official Hinman, Coinbase and Hong Kong

In this issue

  1. U.S. crypto crackdown: Collateral damage
  2. Ripple: Mixed messages
  3. Hong Kong: Courting Coinbase

From the Editor’s Desk

Dear Reader,

Last week, I was in Hong Kong as Forkast Labs announced our partnership with The Sandbox to index the metaverse. We held the event in the trendy Sheung Wan district and we had double the capacity than we had expected. The Web3 industry crowd in the city of 7 million was excited and the room was buzzing. Much was discussed, plans were laid, and opportunities were seeded. That’s the mood halfway across the world from the chill that is only deepening in the U.S.

It’s often said that one person’s loss is another person’s gain. We are seeing that play out as U.S.’s regulatory assault on the cryptocurrency industry intensifies.

The fact that USDC stablecoin issuer Circle was granted a license to operate as a major payment service provider by Singapore’s central bank in the same week as the Securities and Exchange Commission was busy bringing the roof down on crypto in the U.S. could not have offered a clearer bellwether of gainers and losers.

If U.S. regulators’ hostility to crypto isn’t already benefiting other jurisdictions’ efforts to get a slice of the action as the industry develops, just give it time.

Not even a lot of time: Just this past weekend, a Hong Kong legislator invited SEC-targeted U.S. crypto exchange Coinbase — and indeed “all global virtual asset trading operators” — to set up shop in the city. The lawmaker’s callout came just two weeks after Hong Kong implemented a much-anticipated regulatory framework for virtual asset trading platform operators — a.k.a. crypto exchanges — that’s the centerpiece of an initiative aimed at making the city an international crypto hub.

Movement is afoot.

Dubai has been busily burnishing its credentials as a crypto hub for the past year, and continues to attract crypto exchanges thanks to a favorable regulatory environment and rapid licensing approvals.

On a grander scale, the European Commission last month approved the EU’s Markets in Crypto-Assets regulation, a comprehensive regulatory framework for the sector that will bring it into the mainstream from next year in a way that Americans might find difficult to imagine amid the cack-handedness of Washington’s punitive approach.

And let’s not forget the United Kingdom, whose prime minister, Rishi Sunak, has long been an advocate of digital financial innovation. It’s likely that the regulatory melee in the U.S. will only add to the UK’s attractiveness as a destination for crypto companies seeking regulatory refuge but which may prefer the steady hand of the Bank of England to that of less storied authorities in jurisdictions such as the Emirates.

As U.S. regulators persist with their regressive stance, it feels appropriate to quote an American pioneer from a field at least as innovative as crypto decades ago — astronaut Buzz Aldrin, who said: “For every winner, there’s a loser. And that person didn’t really need to lose. They just didn’t understand the game plan.”

The game is on. 

Until the next time,

Angie Lau,
Founder and Editor-in-Chief

1. Crypto-quake continues

Binance.US could be an early casualty of the SEC’s crypto crackdown as the regulator pursues a lawsuit against it and its liquidity plunges. Image: SEC/Canva

Binance.US, a crypto exchange set up by Binance chief Changpeng “CZ” Zhao to serve U.S. clients, could see its operations “quickly grind to a halt” if a U.S. court rules in favor of a Securities and Exchange Commission (SEC) request to freeze its assets, the company has said in a court filing. The SEC and Binance.US have been ordered to compromise and avoid a complete asset freeze. Meanwhile, trading platforms eToro and Robinhood have delisted multiple cryptocurrencies named in SEC lawsuits as securities.

Forkast.Insights | What does it mean?

The fallout from the filings against both Binance and Coinbase in the U.S. has hit crypto markets for two reasons. The first and most obvious is that the U.S. arm of the world’s largest crypto exchange by volume — and America’s most popular exchange — will no longer have access to the world’s biggest single crypto market.

The second, and likely more damaging, impact has been the SEC’s move against cryptocurrencies more broadly. For anyone who has followed the SEC’s approach to crypto, it should have come as no surprise. 

When it filed its cases against Bittrex and Kraken earlier this year, the SEC’s argument was that both exchanges were selling unregistered securities. In its most recent filing against Binance, however, the SEC’s case is more focused on the commingling of funds and other potentially fraudulent activity. Yet the Coinbase case appears to mirror those involving Bittrex and Kraken.  

This has meant the focus has shifted from the exchanges themselves to the tokens available on them, raising enough questions for companies such as Robinhood and eToro to stop offering them on their platforms. 

That doesn’t mean an end to crypto in America. Other projects that haven’t been listed as securities offer lessons for others to follow, specifically on how they raised money and from which types of investors. 

Projects that steered clear of U.S. public sales in favor of private sales to accredited investors appear to have been left alone by the SEC. Although those named in the regulator’s legal actions have a fight on their hands, a path for crypto in America is slowly emerging, most notably the use of “simple agreements for future tokens.”

These agreements avoid the thorny issue of whether tokens are securities by selling contracts for cash as opposed to tokens themselves. Although they are available only to accredited investors, they offer a tool for fundraising that’s compliant with current regulation.

2. Say one thing…

Suggestions by former SEC official William Hinman (above) that Ether was not a security have aggravated Ripple’s legal chief. Image: SEC/Ripple

William Hinman, a former director of corporation finance at the U.S. Securities and Exchange Commission (SEC), said in a speech five years ago that Bitcoin and Ether were not securities, according to documents released on Tuesday as part of a lawsuit brought by the regulator against crypto company Ripple.

Forkast.Insights | What does it mean?

William Hinman’s dividing line between Ether, Bitcoin and everything else might help Ripple’s defense in its legal battle with the SEC, but it does little to help others understand the commission’s confusing approach to regulating crypto markets more broadly.

Stuart Alderoty, Ripple’s chief legal officer, said on Twitter earlier this week that Hinman’s speech was flagged by his SEC colleagues because it was flawed and would muddy the waters even further on the question of whether cryptocurrencies should be treated like securities. Hinman, according to Alderoty, ignored their warnings. 

Confusion has resulted elsewhere, too. The 19 tokens named in the SEC’s lawsuits against Coinbase and Binance have found themselves on the wrong side of securities law, but others that raised capital in similar ways appear to have avoided such troubles. Why? 

In the U.S. president’s annual economic report earlier this year, the White House stated: “Regardless of the label used, a crypto asset may be, among other things, a security, a commodity, a derivative, or another type of financial product, depending on the facts and circumstances.”

The SEC, thus far, hasn’t shared its working thesis of how it decided the 19 tokens (and Ripple) were lawbreakers but not others, suggesting that it prefers legal action over regulatory clarity. Ripple will try to exploit that muddled view, but the persistent uncertainty will do little to help others. 

3. Open for business

Hong Kong’s courtship of crypto companies such as Coinbase forms part of the city’s efforts to position itself as a global crypto hub. Image: Coinbase/Canva

A legislator in Hong Kong has encouraged Coinbase and other international cryptocurrency exchanges to set up operations in the city, following the implementation of its new regulatory framework for retail crypto trading on June 1.

Forkast.Insights | What does it mean?

Hong Kong lawmaker Johnny Ng, who includes “Web3” and “smart city” as part of his Twitter profile description, has contacted Coinbase about its potential expansion to Hong Kong, he said on Twitter on Wednesday.

Although one might view Ng’s words as political rhetoric, his pro-cryptocurrency stance reflects Hong Kong’s overall regulatory attitude: a risk-based approach toward regulating crypto assets and stablecoins.

Coinbase has eyed opportunities outside the U.S. as it faces legal jeopardy from the SEC. In May, the Nasdaq-listed crypto exchange opened an offshore derivatives exchange in Bermuda to allow institutional clients to invest in Bitcoin and Ether via perpetual futures contracts that can offer leverage up to a factor of five.

Coinbase may have some serious thinking to do if it wants to expand globally, given its heavy reliance on a U.S. revenue stream. In the first quarter of this year, its U.S. earnings accounted for US$686.8 million of total earnings of US$772.5 million, according to its latest financial report.

Binance has a strong presence in Asia, while most of Coinbase’s operations remain in the U.S. That means it would be complex for Coinbase to shift the focus of its operations outside the world’s largest economy, especially if moving to Hong Kong would not necessarily put it out of the reach of U.S. regulators. Given that, it remains to be seen how the SEC’s crackdowns on Binance and Coinbase will play out on an operational level, and what actions two of the world’s biggest crypto exchanges will take to mitigate their legal risks. 

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