Smaller firms have quietly settled with the SEC rather than face a long and costly legal battle. Coinbase shows no sign of settling. In fact, it has responded to the SEC’s action by filing its own lawsuit demanding that the SEC publish clear regulatory guidance for crypto firms looking to do business in the United States.

The drama is fun to watch. But it’s also important. The US is the world’s largest economy, and one possible outcome is that it could become forbidden territory for crypto.

The stakes are high. Not just for Coinbase, but for the entire crypto world.

TLDR 📃 

• The SEC and Coinbase are engaged in a battle that could prove decisive regarding crypto’s future in the United States.
• Given the size and influence of the US market, any decision will have industrywide effects.
• The best case: Coinbase prevails in its efforts to force the SEC to provide unambiguous regulatory guidance to crypto businesses and users in the US.
• The worst case? Crypto businesses and tens of millions of users are prevented from participating in the crypto world.

The SEC crackdown on crypto exchanges 🔫

The SEC's undeclared war on the crypto industry has left users and exchanges in a state of uncertainty. Observers initially thought the SEC was waiting for the outcome of the Ripple case before going after crypto exchanges, but the collapse of FTX seems to have hardened their resolve. Bittrex is currently facing charges while Kraken has been forced to pay a $30 million fine and abandon its US staking services.

The SEC's pursuit of crypto exchanges has raised eyebrows, but no exchange dared to challenge the SEC's claims in court. 

All of that changed when the SEC went after Coinbase.

Coinbase's battle with the SEC 🪖

In March, Coinbase received a serious warning from the SEC  –  a so-called "Wells notice"  –  asserting that some of the exchange’s key business activities were in trouble. The SEC was concerned that Coinbase was selling securities that were not properly registered, which is against the law.

Most exchanges respond to Wells notices by keeping quiet and resolving issues discreetly. Not Coinbase. Frustrated by the SEC's lack of regulatory guidance to the crypto industry, Coinbase went on the offensive. The exchange published articles that exposed the challenges it faced while trying to work with the SEC, including a lack of clarity on the classification of tokens as securities and applicable regulations in the United States.

Coinbase has taken several steps to defend itself and the cryptocurrency industry against the SEC's allegations. Unlike smaller firms, Coinbase seems eager to fight the SEC in court.

So what happens next? We avail ourselves of the court system to finally start to get some clarity for the crypto industry in the U.S. Ironically, establishing some case law may be our best shot at getting the regulatory clarity that the industry deserves. 14/15

— paulgrewal.eth (@iampaulgrewal) March 22, 2023

In addition, Coinbase escalated the battle by filing a lawsuit of its own. Coinbase seeks an order from a federal appeals court to compel the SEC to provide clearer regulations to crypto companies. 

This action demonstrates Coinbase’s willingness to challenge the SEC and obtain greater regulatory clarity for the entire industry. The Third Circuit Court of Appeals has granted the SEC just 10 days to file its response.

Implications for the future of crypto 🔮

The crypto industry is facing a challenging time in the United States. Regulators are prosecuting crypto companies and their executives for violating regulations without telling the companies in advance whether the regulations apply to them or not.

The Coinbase case could spread the blessings of US regulatory clarity across the entire industry.

If Coinbase wins its lawsuit, the precedent could have a positive impact on the future of crypto in the United States, which means the entire crypto community benefits from tens of millions of users. 

The legal fight is expected to be an uphill battle, and it could take a considerable time to resolve. Nevertheless, this battle is crucial for the future of the industry in the United States.

Here are some scenarios that could play out and their impact: 

Worst case: If the SEC wins, the consequences would be significant. Coinbase may lose revenue, be fined, or forced to leave the US. This outcome could establish precedent for treating tokens as securities, and the SEC would likely pursue additional crypto exchanges. Exchanges would shut down their US operations rather than face enforcement measures, and this could lead to at least a short-term drop in crypto prices. Overnight, $30B in monthly consumer exchange volume and 28 of the top 50 crypto companies by valuation could be off the market.

Base case: If Coinbase wins the case but without clear regulatory guidance, crypto firms would still lack sufficient confidence to serve American users. The impact on crypto prices would likely be neutral, as the ruling would not provide significant regulatory changes. But transaction volume and total value locked on-chain would surely drop for many popular protocols. 

Best case: If Coinbase wins and the court requires the SEC to provide clear regulatory guidelines, it could provide a significant boost to the industry. Crypto companies would have more clarity and confidence to operate, which could attract more investment and innovation. The ruling could set a precedent for other exchanges to challenge the SEC, limiting the regulator's power over the industry. This increased clarity and certainty could fuel growth and encourage companies to stay in the U.S., which would boost crypto usage rates and prices. 

Cryptonary’s take 🧠

Coinbase's response to the SEC's "Wells notice" represents a glimmer of hope for the crypto industry. As one of the crypto world’s largest players, Coinbase has the power to push back against the SEC's aggressive stance towards crypto in the US. 

Based on recent appearances in court by the SEC and the testimony of SEC Chair Gary Gensler in Congress, there is a decent chance that Coinbase could make a strong case that the SEC has not been acting in good faith  –  especially given Gensler's previous statements on the SEC's lack of suitability as a crypto exchange regulator.

We must also consider the possibility of a backfire if the SEC prevails against Coinbase in court.

It is crucial to monitor developments in this case, as the potential outcomes could have long-lasting effects on the crypto industry.

Action points 🎯

1. Stay informed about Binance’s regulatory troubles. Learn more about the potential outcomes by reading this Cryptonary article. 
2. Consider upgrading to a Cryptonary Pro membership to gain access to our Skin in the Game reports. Every month, we give members an update on our portfolio and share our actual investments. You'll be able to see how we're positioning ourselves in 2023 and which assets we're bullish on.