SEC's Coordinated Strike Indicates Imminent Crisis

The SEC has unleashed an all-out attack on the crypto sector—and the timing is meaningful.

On Monday, the SEC filed 13 charges against Binance.US, related to running unregistered exchanges and the sale of unlicensed securities.

Within 24 hours Coinbase—warned via a Wells Notice some weeks ago—became the next target. The SEC sued the exchange for alleged securities violations relating to its staking product.

The SEC's press release states:

According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law.

A lot of this doesn't appear to make sense, given that Coinbase's 2021 IPO was approved by the SEC. The SEC has designated various crypto assets traded on Coinbase as securities, and then sued Coinbase for running an unlicensed securities exchange—without giving the organization due warning that it was doing anything wrong.

It wasn't just the SEC, though. This was a wider, organized effort against the exchange, as almost a dozen state regulators also filed on the same day.

This was coordinated as fuck.

Looks like 10 US state regulators joining SEC claims and filing actions against Coinbase today trying to drown them in paperwork.

For example, here is Alabama: https://t.co/R5UThZqX99

— Adam Cochran (adamscochran.eth) (@adamscochran) June 6, 2023

There's too much wrong with the SEC's activity to unpack in a short post, but it's all part of Operation Choke Point 2.0: An organized but unconstitutional campaign to shut down the crypto sector through regulatory enforcement and shutting crypto firms out of the banking system.

An Organization In Trouble?

While the SEC has filed lots of lawsuits, not much has got as far as the courts yet. These things take time. But one case that has not only got to court but almost reached a verdict is the SEC's case against Ripple. The SEC filed against Ripple Labs in December 2020, claiming that the company's sale of XRP tokens was an unregistered securities offering.

The verdict is due later this year, but there are indications the case isn't going well for the SEC. Specifically, the so-called Hinman emails have proven a major thorn in the regulator's side.

The Hinman emails refers to a collection of internal SEC messages that were sent following a 2018 speech given by former SEC Director William Hinman. The gist of these documents is that even if a cryptocurrency technically met the criteria to be considered as a security at its launch or sale, its status can transition to that of a commodity once it becomes adequately decentralized.

During the case with Ripple, the SEC sought to keep the Hinman emails sealed. Their bid failed, and the documents are set to be unsealed within the week. This will show whether the SEC discussed XRP specifically around the time of Hinman's speech, and will almost certainly have a huge impact on the case, since it may help determine—among other things—whether trades of XRP on the secondary market are legal.

XRP has rallied strongly since the start of the year, indicating the crypto community's growing confidence in a favorable outcome for Ripple. Moreover, if the case establishes that XRP is not a security, it would have potentially far-reaching implications for the rest of the crypto sector.

Given these developments, the scattergun approach of lawsuits unleashed by the SEC starts to look more like desperation than rational strategy. As opposition to its "regulation by enforcement" approach grows, awareness of the regulator's failings and overreach is better understood by American lawmakers, and its case against Ripple runs into problems of its own making, the SEC is finding itself on the other end of some harsh scrutiny.

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