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Ever since Gary Gensler has taken up the role of Wall Street’s chief regulator two years ago, he has consistently expressed his determination to bring order to the crypto realm, which he compares to the lawlessness of the “Wild West.” Recently, he made good on his promise in a significant way.

The Securities and Exchange Commission (SEC) issued a multitude of accusations against two major crypto exchanges, Coinbase and Binance, initiating a legal conflict that will shape the destiny of digital currencies.

Here’s what to know about the whole scenario and how it will shape the future of crypto.

A little backstory…

Last week, the US Securities and Exchange Commission (SEC) made significant moves against two prominent crypto exchanges, Binance and Coinbase. This legal action came after months of discussions, threats, and warnings from the SEC. While the SEC’s actions were not entirely unforeseen, the simultaneous pursuit of both exchanges caught the market off guard, amplifying the repercussions of these actions. The SEC filed a lawsuit against Binance, the largest crypto exchange around the world, on Monday, 5th May, and followed up with a lawsuit against Coinbase, the largest crypto exchange in the United States, the next day.

What are the allegations?

Binance and its founder, Changpeng Zhao, are accused of violating securities laws by allowing US customers to trade on Binance.com despite the prohibition on users from the United States. This action is said to have resulted in the commingling of billions of dollars, which goes against regulatory guidelines. Similarly, Coinbase has been charged by the SEC for engaging in the securities market without proper registration and operating as an unregistered securities exchange, broker, and clearing agency.

Interestingly, the SEC’s lawsuits against both crypto exchanges do not mention Ethereum (ETH). This omission could be attributed to the fact that the Commodity Futures Trading Commission (CFTC) has already classified ETH as a commodity rather than a security. The SEC’s approach in these particular lawsuits might have been influenced by the CFTC’s declaration regarding Ethereum’s classification. This highlights the intricate relationship and interplay between different regulatory bodies when it comes to determining the categorization of cryptocurrencies.

Now, the question arises as to whether traders or investors should be concerned. In short, the answer is no. Lawsuits and settlements are common occurrences in the finance and banking sectors and are considered part of the industry landscape. Major banks such as HSBC, Bank of America, JPMorgan Chase, and Citigroup have faced substantial penalties amounting to billions of dollars for various infractions. For example, Bank of America alone has been fined an astonishing $60 billion.

Is all this just a part of the ‘beginning of an end’?

All the enforcement actions indicate that the SEC has chosen to cast a wide net over crypto companies it perceives as evading regulations. It alleges that some companies blur the line between domestic and offshore services, as seen in the case of Binance, while others engage in the trading of unregulated securities, as alleged against Coinbase.

At the core of the matter lies a fundamental question: are cryptos genuinely innovative entities that require a different regulatory framework, or are they merely digital representations of existing financial instruments that the SEC already oversees? The SEC leans toward the latter perspective, believing that a significant portion of the industry falls within its existing regulatory purview. Therefore, the agency seeks to ensure compliance among crypto companies operating in the United States or urges them to cease their operations altogether.

What now for crypto?

Crypto analyst Will Clemente from Reflexivity Research recently drew attention to the fact that a significant 86% of all crypto trading volume takes place outside the United States. This statistic is noteworthy as it implies that regardless of regulatory outcomes within the US, the international adoption of cryptos is unlikely to be greatly impacted. In fact, any stringent regulatory actions taken in the US may even accelerate the adoption of these assets outside the country. This could result in more individuals and companies relocating offshore and embracing cryptos, recognizing their global nature rather than being limited to US-based assets.

The positive aspect is that users and companies will finally receive clarification on whether cryptos can be classified as securities. The courts will consider arguments from both sides and ultimately determine the securities status of these assets. This much-needed clarity will have a significant impact on the crypto industry.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.