Coinbase, Binance lawsuits: Regulators ‘trying to make crypto operators operate in compliance,’ professor says

Lehman College Business and Economics Professor Sean Stein Smith joins Yahoo Finance Live to discuss takeaways from bank instability for crypto markets, contagion fears, crypto regulation, and the outlook for Binance.

Video Transcript

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- Digital assets increasingly seen as a more liquid way of accessing money during crises like the one that brought down SVB, Signature Bank, and others. But it comes with its own set of risks. This as regulators take on crypto globally. Joining us with more, Sean Stein Smith, business and economics professor at Lehman College. Good to see you, Sean. So I want to first start with the actions taken by the CFTC. We saw what happened with that Binance announcement. What is the state of play at the moment here?

SEAN STEIN SMITH: Yeah. And so-- and so really, the last half year or so, it has been a total pivot on a oversight point of view, be it the ongoing Coinbase lawsuits, the Kraken lawsuits, Binance lawsuits. Pretty much every policymaker, regulator, both here in the US and internationally, has moved hard not against crypto per se, but they are trying to make crypto operators operate in compliance with the current laws on the books. But they're also doing so, and they haven't quite issued crypto-focused guidance. So it's a really interesting time to analyze how these firms are going to navigate all of this ambiguity going forward.

- Because we have talked about this issue of regulation by enforcement, sort of trying to figure it out. We know that we thought it was going to be the SEC making another move with Binance, but instead a different branch of government here. So how are some of these crypto companies keeping pace, then, when you have these changes in the US and now the G7 looking for tighter frameworks on crypto, as well?

SEAN STEIN SMITH: Yeah, so absolutely. I mean, for any operator out there trying to either handle customer trades, issue their own tokens, it really has been a uphill battle. And I don't think it is poised to get easier anytime soon, right, because as you said, there is still ambiguity as to who even oversees which types of operators, right? And this whole regulation by edict or by court case is a real problem, right, because from a business planning, business continuity point of view, it's almost impossible to plan, invest, or to actually create products and services in compliance if those rules are not clear up front.

- So then what does that mean if you are someone who invests in crypto and you're trying to manage this, and you know your taxes are coming up? How are you supposed to manage that with all these new regulations?

SEAN STEIN SMITH: So it's a really interesting point there, right, because on the one hand, there are these onslaught of lawsuits, court cases, Wells notices and all the rest, but there haven't really been too many trials that have come to fruition as of yet. And so right now, sort of the best way that I'm advising folks to analyze this is to always do your homework on the token in question, on the operator in question, and to always work with an individual, be it a lawyer, CPA, or other asset management individual out there who has expertise in higher risk assets, like gold, commodities, crypto, and also has the in-house expertise on the token in actual question.

- And a lot of people wonder when it comes to contagion. Obviously, sometimes when you get some bad news about a token or about a platform, we do see that reverberate. But how much of this is contained within an FTX, within a Binance, versus sort of industry-wide for crypto?

SEAN STEIN SMITH: Mhm. And so the ongoing cases against FTX, Coinbase, and Binance really are three different cases. FTX more and more, based on the evidence and the allegations, isn't really so much a problem with crypto, but it really-- but it really was a problem with how the company itself was actively managed. Coinbase is a really interesting case, right, as a platform here in the US, publicly traded, a audited enterprise is also being sued by the SEC. So all of that's going to be interesting to see how they try to parse all of that out.

And then ultimately, Binance has been on the hot seat pretty much ever since it opened up, right, both here in the US, overseas. And there have been questions about who it's doing business with, how it's communicating to investors here in the US, and how it's handling funds from its external customers. So while all three cases are in the broader blockchain space, crypto space, all three of them really are different. And it's going to be really interesting to see how they all play out based on those individual facts.

- So then outside of individual tokens, where are we seeing inflows when it comes to crypto or blockchain-related stocks and investments?

SEAN STEIN SMITH: Sure. So it's been very, very interesting that, even as the SEC, CFTC, G7, OCC, pretty much every agency in the world has been trying to crack down and to enforce more compliance on the blockchain-native operators, crypto-native operators, it has been incredibly telling that pretty much every large financial institution in the world, be they asset management firms, banking institutions, or even college endowments, have been actively either trying to roll out their own products and services via ETFs or they're actively implementing their own enterprise blockchains. So it's been really, really interesting to watch that, as the blockchain space, crypto-native companies are under extreme pressure right now, that other companies-- TradFi companies, banks, all the rest-- are actively moving into those areas.

- Always interesting to see what institutional investors are doing while sort of retail investors get caught up in some of the panic there. Great having--

SEAN STEIN SMITH: Absolutely.

- --you on. Sean Stein Smith, business and economics professor at Lehman College. Thank you for joining me in this morning.