Not Joshua Klayman.
The U.S. head of fintech and Head of Blockchain and Digital Asset at the law firm Linklaters long forecast last week’s bombshell announcements. So she’s not surprised by them. To Klayman, the SEC’s actions spring naturally and logically from statements that chair Gary Gensler has been making for years – namely that most cryptocurrencies are in fact securities and that exchanges like Coinbase were always likely to be targeted for selling their securities without an official license.
“I see this as a massive push, a very unsubtle move by the chairman Gensler and the SEC,” she tells CoinDesk. “They’ve been trying to nudge the industry for a long time to change its practices, and now it seems they moved from nudging to a pretty swift kick, or, you might say, a one-two punch.”
The SEC is telling the crypto industry: The runway has ended, and things need to change now, Klayman says.
“There is a saying by [the writer] Upton Sinclair: ‘It is difficult to get a man to understand something when his salary depends on his not understanding it.' And I think if I were a regulator I might take the position: it’s not a matter of us not expressing that this industry should be treated like traditional securities. It’s not the lack of clarity. It’s that the industry doesn’t want the answers,” Klayman said.
The timing of the lawsuits isn’t an accident, Klayman added. The lawsuits are coming as the U.S. Congress is discussing the “Digital Asset Market Structure and Investor Protection Act” draft bill introduced in 2021. The SEC wants to make its mark. The industry has asked regulators and lawmakers to provide “clarity” and now they’re, arguably, starting to provide clarity. The SEC wants to be seen as acting.
“People have long said: ‘SEC, you have rule-making ability, make rules.’ And we’ve seen the SEC now propose multiple rules that the industry is not really happy about,” Klayman says.
For example, earlier this year, the SEC proposed two rule changes, including a proposal to expand the definition of exchange and the one to expand the existing custody rule, both of which would inscribe crypto assets into the existing securities regulations. The first proposal received a lot of feedback from the public, so the SEC prolonged the comment period in April until June 13 "and addressed many of the responses," Klayman said.
Way out of crisis
That’s not to say one can’t disagree with the SEC’s approach to regulation. In making these lawsuits, SEC has given its opinion. It’s now up to the courts to decide on the specifics.
“It’s a tough area because a lot of time people look for bright-line rules,” she said. “The whole reason we have something like the Howey test [defining what’s a security] and we say it’s about facts and circumstances is because there are no-bright lines.”
This cuts both ways, giving both the SEC and the companies targeted a chance to convince the court that facts and circumstances prove their point.
This likely means a years-long litigation battle for Coinbase and Binance, and continuing uncertainty for companies with similar exposure to the law.
Both of the sued exchanges “have very deep pockets and appetite to go through long and expensive fights, but it doesn’t mean that everyone else does,” Klayman said. Crypto companies will need to take a hard look at their risk tolerance and decide whether they have the stomach for grinding legal battles: “If you don’t want to be involved in a fight, then maybe you change your behaviors here.”
“If you need money to be able to fight a multi-year [legal] fight, and you’re making money a certain way, there are two questions,” Klayman says. “On one hand, maybe you continue doing what you’re doing to fund your defense. On the other hand, if you make any changes [to your business], will the SEC say that this was an admission that you did something wrong?”
The case of Bittrex, another U.S. exchange, might serve as a warning example here, Klayman said. When the exchange deleted statements from its website, the action was interpreted by the SEC as the admission that the company understood they could attract regulators’ attention.
Read more: David Z. Morris - The SEC Is Fighting the Last War
The situation is troubling not only for exchanges but for token projects, too: after the SEC mentioned Cardano (ADA), Polygon (MATIC) and Solana (SOL) in the two lawsuits, the trading platform Robinhood immediately announced it wouldn’t support trading them anymore.
“One of the big unanswered questions the SEC needs to answer is, if it believes that 50,000+ assets are securities, what happens to them, are they going to be forever banned from trading in the U.S., will they be grandfathered in? Is secondary registration the way to go?” Klayman said.
Ultimately, though, the lawsuits are not about tokens per se; they are directed at companies that sell tokens. “In my view, the SEC is trying to show that some of these [tokens] may be securities, but the big fish they are trying to hook here are the trading platforms, not necessarily the tokens,” Klayman said.
It might be that the Coinbase and Binance lawsuits might convince the U.S. Congress that it’s time to act, but, most likely, many important issues will still have to be resolved in court, Klayman believes.
Before the downfall of FTX last November, there were several legislative attempts in Congress to liberalize the regulatory regime for crypto, including the bill by Kirsten Gillibrand and Cynthia Lummis and the Digital Commodities Consumer Protection Act. But “there was no political will to pass those.” Now, post-FTX, Congress is pretty polarized on crypto, which makes reaching a consensus on the way forward harder.
“The likelihood that we get legislation that will be liberalizing is unlikely. It’s more likely to make things tighter,” Klayman said.
With Gensler’s public comments last week that the U.S. “doesn’t need more digital currency,” there is “an element of political theater and there is an element of convincing” the public that the SEC is doing the right thing, Klayman said.
She thinks that Gensler could have his own political reasons for such statements.
“There have been speculations that [Gensler] has designs to be the secretary of Treasury one day. And what does the Treasury have? It has dollars!” Klayman added.
She is generally optimistic about the future of the industry, especially where crypto can expand the realm of capital markets, for instance, in the tokenization of real world assets and tokenized securities.