The allegations made by the U.S. Securities and Exchange Commission (SEC) against cryptocurrency exchanges, Binance and Coinbase could significantly shape the trajectory of crypto in the United States, according to CoinShares.
These unfolding legal developments surface amidst a stark divergence in regulatory developments between the European Union and the United States.
The EU, armed with the MiCA (Markets in Crypto-Assets) framework scheduled to commence in late 2024, has chosen to acknowledge digital assets as a new class of assets.
This stance mirrors an intricate understanding of digital assets’ unique attributes, while simultaneously supporting innovators striving for regulatory compliance, even when past efforts have been less than perfect, CoinShares said in a report.
As a contrast, without political guidance, the U.S. approach is being driven by the SEC and state regulators, endeavouring to place digital assets within pre-existing regulatory structures, such as securities or commodities.
“This approach seems less forgiving of past non-compliant behaviours, notwithstanding the hitherto lack of clarity within the regulatory environment,” CoinShares said.
“The lawsuits against Binance and Coinbase, and let’s not forget the on-going Ripple/XPR litigation, can be viewed as an embodiment of this differing regulatory philosophy,” CoinShares added.
The allegations against Binance, Binance.US, and their executive Changpeng Zhao (CZ), including offering unregistered securities and violating securities law, necessitate thorough examination, according to CoinShares.
Likewise, the charges against Coinbase, encompassing registration and custody issues, will critically influence how the United States comprehends and regulates cryptocurrency exchanges and custodians.
Of particular interest, according to CoinShares, is how the SEC is weaponising Coinbase’s marketing efforts as part of this lawsuit, highlighting the need for explicit definitions and standards within the crypto industry.
The SEC’s case implies that cryptocurrency platforms should be regulated commensurate with their operational roles within the financial ecosystem.
While the lawsuit seems to carry more severe implications for Binance, the potential impact on Coinbase and the broader crypto industry is significant, CoinShares stressed.
“The charges insinuate that a majority of crypto assets should be categorised as securities, which would radically modify the regulatory landscape, potentially confining access to regulated Wall Street entities (assuming that they have the appetite once the litigation is over),” CoinShares said.
This shift could potentially place the control of the crypto industry firmly within the grasp of traditional financial institutions, with profound implications for the promise of innovation and democratisation inherent in blockchain technology, CoinShares added.
CoinShares anticipates regulatory certainty becoming a critical factor for digital asset players.
Places like the EU, Switzerland, UAE and Hong Kong are endeavouring to develop bespoke crypto frameworks, the asset manager said.
Given the existing regulatory discrepancies, a volume shift in trading and innovation from the U.S. to jurisdictions with more accommodating regulatory landscapes might be imminent, according to the report.
“This shift could have significant economic and strategic repercussions for the U.S. within the burgeoning digital asset space,” CoinShares said.
“This lawsuit and its potential outcomes, while significant, do not spell doom for the crypto industry. Instead, they underscore the critical need for robust regulations to protect investors and maintain market integrity. We believe that clarity and appropriate regulations are vital to carving a sustainable path for the crypto industry,” CoinShares added.
Looking ahead, CoinShares foresees a dichotomy developing in the global crypto landscape.
In the U.S., the asset manager anticipates that traditional finance, with its existing regulatory compliance and familiarity, is poised to assume a commanding role in the crypto sector.
The regulatory restrictions are likely to mould the crypto industry in such a way that it could potentially mirror the existing financial system, with its well-established regulations and institutions, CoinShares said.
On the other hand, in the EU and other countries developing a bespoke framework for crypto, CoinShares’s outlook is that innovative, crypto-native financial entities are likely to continue flourishing and shaping the future of the finance industry.
“These emerging entities, armed with novel technologies and nurtured by a more permissive regulatory environment, are poised to drive significant advancements and disruption in global finance,” CoinShares said.
“This regulatory arbitrage is evident in the data, where we are seeing a shift away from the U.S., having seen market share of spot Bitcoin & Ethereum volumes fall from 85% at the start of 2023 to 70% today. It is reasonable to expect this trend to continue,” CoinShares added.
CoinShares said it remains steadfast in their commitment to contributing to these pivotal discussions and collaborating with regulators to nurture a transparent, secure, and equitable crypto ecosystem.
