U.S. SEC Crackdown Could Be Bad News For This Indian Crypto Firm
Among the tokens classified as an unregistered security in both lawsuits is Polygon’s MATIC.
Two of the world’s largest crypto exchanges are in the regulatory bull’s eye in the United States of America.
Both Binance and Coinbase, in effect, stand accused of operating unregistered stock exchanges, according to the U.S. Securities and Exchange Commission’s lawsuits against the exchanges. The lawsuits allege that these exchanges facilitated trading in tokens which resemble financial securities and hence violated the law.
Among the tokens classified as an unregistered security in both lawsuits is Polygon’s MATIC token. Founded in Mumbai in 2017, Polygon operates a blockchain that is meant to help scale up activity on Ethereum—an older blockchain.
At its peak in December 2021, Polygon’s Matic token held a market capitalisation of over $20.5 billion. Since then, sentiment has cooled but Matic still commands a market capitalisation of over $7 billion.
If the SEC wins its lawsuits against the exchanges and Polygon is classified as a security in the United States, it could have wide-ranging implications for both the company and the crypto ecosystem at large. Polygon declined to comment on the SEC's allegations and their possible impact.
The primary concern is shrinking liquidity for crypto assets. US adults have among the highest individual exposure to crypto assets and losing that market would be painful, an executive who formerly worked with Ethereum and Polygon, said on conditions of anonymity. About 17% of all US adults have invested in, traded, or use one or more crypto assets, according to an April survey by Pew Research Center.
If other countries follow’s the SEC’s regulatory approach, the problems could get even deeper, the executive said. Other tokens identified as unregistered securities by the SEC include: SOL (Solana blockchain), Flow (Flow blockchain), ADA (Cardano blockchain), FIL (Filecoin network), among others.
“Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets.”US S.E.C. vs. Coinbase, Inc. and Coinbase Global, Inc.
“Defendants [Binance] have engaged in multiple unregistered offers and sales of crypto asset securities and other investment schemes.”US S.E.C vs. Changpeng Zhao, Binance Holdings Limited, BAM Trading Services, BAM Management US Holdings
"Regulatory activity in the U.S. is bound to impact the sector globally," Sharat Chandra, co-founder of India Blockchain Forum said.
Given the pre-eminence of U.S. financial markets enjoy globally, the country's approach on regulation will undoubtably spillover to others, an executive at an Indian crypto exchange said, also speaking on conditions of anonymity.
The regulatory impact may be limited to one country for now but pressure on big players in the sector will reduce liquidity for the entire market, this person said.
Liquidity on Binance had already reduced sharply in the two-three weeks preceding the lawsuit, the founder of a second crypto exchange told BQ Prime, also on the condition of anonymity.
The SEC's actions are way too late and it's hard to understand their agenda, the founder of a third crypto exchange said. Since the assets classified as securities have been around for at least 3-4 years, classifying them as securities now does little to help, this person said.
A Precedent Forms
Cities like Dubai have emerged as a haven of sorts of crypto enterprises after regulators in other countries—including India have clamped down on the sector.
Dubai has a looser regulatory regime and people often get opinions from lawyers saying that 'x' token is not a security and hence can be a crypto token, the founder of the second crypto exchange mentioned earlier told BQ Prime While lawyers were okay giving those opinions since there was no precedent, now one might emerge and make things trickier in Dubai or other friendly jurisdictions as well, this person added.
At the core of the SEC's lawsuit though is an argument that crypto assets are nothing financial instruments that help you invest in the work of others in expectation of a profit—much like equity shares. While the lawsuit against Binance lists many other violations including mishandling of customer funds and active avoidance of regulation, the lawsuit against Coinbase is more focused on the security or token debate.
Coinbase has decided to push back against the SEC's allegations.
"Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it," Brian Armstrong, the firm's CEO, wrote in a Tuesday tweet regarding the lawsuit.
For now, the lawsuits will be centre of mind for all involved in the crypto ecosystem as their outcome could very well determine whether crypto is an asset class of its own or was simply masquerading as one.