What will the lawsuits of the US authorities against the largest crypto exchanges lead to?

Since the US Securities and Exchange Commission (SEC) filed a lawsuit first against the largest crypto exchange Binance and then Coinbase on June 5, the capitalization of the crypto market has fallen by 8.5% to $1.052 trillion by June 13. The value of bitcoin lost 4.9% over the same period, reaching $26,000. All cryptocurrencies from the top 10 (excluding stablecoins) lost in price, but Cardano lost the most (30%). Shares of Coinbase itself fell 17.5% to $53.28.

The SEC has accused the crypto exchange Binance Holdings Ltd., its American division and personally founder Zhao Changpeng of violating securities law. The commission’s report alleged that Binance did not register as an exchange or broker, creating excessive risks for investors and depriving them of their protection. The regulator also issued an order to freeze Binance US assets, after which the exchange had to stop working with deposits in dollars. The next day, the SEC filed a lawsuit against Coinbase with similar claims: the regulator’s lawyers are sure that since 2019, the exchange has “earned billions of dollars, illegally facilitated the purchase and sale of cryptoassets.”

Following news of the lawsuits, clients of the two exchanges withdrew more than $4 billion, according to data from the Nansen analytical agency.

The main claim of the SEC against crypto exchanges is the violation of local legislation on the stock market, namely, trading in securities without proper licenses from the American regulator. The SEC considers virtually all cryptocurrencies to be securities, with the exception of bitcoin, its head Gary Gensler noted. The other two claims outlined in the SEC lawsuits against Binance are the mixing of client assets with the assets of the exchange itself and the hidden management of Binance.US by the main owner of global Binance.

Binance is disappointed that the SEC refused to negotiate and decided to act unilaterally through the courts, according to a message on the site’s website. The exchange intends to “vigorously defend” the platform from the latest abuses of the SEC and fight the regulator to the fullest extent of the law. For its defense, Binance hired George Kanellos, formerly Co-Director of the SEC Enforcement Division.

Coinbase General Counsel Paul Grewal told CNBC that the SEC’s reliance on an enforcement approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness. The solution to the problem, according to Grewal, is legislation that allows transparent development and application of fair rules, but not litigation.

At the federal level in the United States, there is no systemic regulation of the circulation of cryptocurrency and its clear regulatory definition, says Oleg Ogienko, director of government relations at BitRiver. Separate explanations by the SEC look more like the position of the regulator itself, since, for example, the Commodity Futures Trading Commission (CFTC) considers cryptocurrencies to be goods, the expert adds. The regulator of the US stock market is now consistently subordinating the industry to local legislation, Ogienko continues: the SEC is fighting hard against any possible competitors to the US currency, which are not controlled by the regulator due to its decentralized nature.

Americans, as usual, want to control everyone, ironically the founder of the MoneyPort cryptocurrency exchange Alexander Faktorov, but with the enormous penetration of cryptocurrencies, this is difficult to do. The USDT stablecoin issuer, Tether, outperforms Visa and Mastercard in terms of transfer volume, but does not report to the government. In 2022, Tether processed $18.2 trillion worth of transactions. Visa and Mastercard over the same period conducted transactions for $14.1 trillion and $7.7 trillion, respectively.

The scale of activity and the capabilities of the two largest crypto-exchanges will stretch the terms of litigation for years, Stanislav Akulinkin, CEO of EMCD mining software developer, is sure. Everything can end with regulatory arbitrage when the largest cryptocurrency exchanges start re-registering in more loyal jurisdictions and stop working with American clients, Ogienko believes. It depends on reaching a compromise between global industry players and US regulators, as well as on how soon transparent and systematic regulation of the circulation of cryptocurrencies will appear in the US.

Crypto exchanges can afford to abandon local markets, as happened with Canada, Akulinkin is sure, but ignoring the American market is “a great luxury.” Factorov calls Binance a “serious monster,” so the lawsuit will be a real fight: the exchange will not give up the market easily. But the United States, like other states, will tighten the screws in the entire industry, the expert believes, and you should be prepared for the fact that the cryptocurrency will not be free, as in the “dreams of enthusiasts”: “Anarchy ended before it even started.”

The cryptocurrency market has recovered quite a lot over the past year, Akulinkin believes, so the impact of individual events on it will be short-lived. The result of the proceedings on the SEC claims will be a signal for all crypto companies in the world, startups and other technological projects in the field of decentralized finance, says Ogienko. But progress cannot be stopped, he argues: distributed registry technologies have already seriously become an element of the financial system, it’s just that the pole of attraction of the entire crypto world can shift to other parts of the world.

American regulators are making a mistake, as many exchanges are likely to look for new jurisdictions, Alexander Brazhnikov, executive director of the Russian Association for Cryptoeconomics, Artificial Intelligence and Blockchain, agrees. The collapse of the FTX crypto exchange in the fall of 2022 did not destroy the industry, he recalls, but, on the contrary, showed that it can cope with large-scale shocks. In this regard, Brazhnikov believes, Russian crypto enthusiasts need to convey to the authorities that Russia can and should become a “friendly” jurisdiction for crypto business.

Russia has competitive advantages for the development of the bitcoin mining industry in the first place, Ogienko is sure. According to him, the situation in the American market only increases Russia’s chances for leadership in the digital economy through the harmonious use of blockchain technologies in the financial system. But in order not to miss these chances, it is necessary to balance the regulation of mining and the circulation of cryptocurrency, the expert says.

In February 2022, Bloomberg, citing sources, wrote that the Russian government estimates the total volume of cryptocurrency on Russian wallets at $214 billion, or 16.5 trillion rubles. At that time, this was approximately 12% of the world’s cryptocurrency assets. According to the results of the first quarter of 2023, Russia took the second place in the world in terms of mining (1 GW of power), follows from the data of the data center operator for mining BitRiver. The United States remained the leader, using 3–4 GW for mining.

Estimates of cryptocurrency ownership among Russians vary from 9 million to 17 million people, Akulinkin draws attention. The penetration of the blockchain repeats the dynamics of the penetration of the Internet with a shift of 20 years ago, so we should expect an increase in the number of Russians in this area, despite any events, the expert is sure.