SEC suing Coinbase: What does it mean for crypto regulation?

As the SEC sues Coinbase and Binance, Brendan Pedersen, Punchbowl News Financial Services Reporter and Author of The Vault newsletter, joins Yahoo Finance Live to discuss how these lawsuits could help shape crypto regulation.

Video Transcript

JULIE HYMAN: The Securities and Exchange Commission is ramping up its crackdown on crypto. Coinbase and Binance are the latest targets in the crosshairs of Chair Gary Gensler. The SEC filed a lawsuit on Monday against the world's largest crypto exchange, Binance, and founder CZ alleging violations of US Securities law.

The next day, the SEC sued Coinbase claiming that crypto exchange failed to register as a national securities exchange, broker dealer, and clearing agency. So while the regulatory backdrop for the crypto industry is still murky, the lawsuits this week raised the question, could we see regulations start to take shape now sooner rather than later? We're seeing regulation by courts, I guess, at this point.

For more, we're joined by Punchbowl News financial services reporter Brendan Pedersen. Brendan, it's good to see you again.

There has been some stuff that has percolated through Congress that it hasn't really gotten anywhere on crypto regulation. And so the SEC is not waiting. They're just doing it. The industry has said, bring it on. We want regulation. I'm not quite sure they wanted this kind.

BRENDAN PEDERSEN: Yeah. That's exactly right. When the crypto sector says, they want regulation, more often than not, they're asking regulators to just develop rules that make it relatively easy for them to fit themselves into the regulatory perimeter. Or they're looking for Congress to do it.

And the SEC under Gary Gensler has made very clear that that's not going to happen. And while there's a number of folks in Congress who have tried, the political environment is just not conducive to that pretty substantial reform.

You're looking at the House. Republicans are pretty interested in crypto reform. You've got some pretty interesting efforts happening between the House Financial Services Committee and the House Agriculture Committee on a big market structure bill that's supposed to basically define who is responsible for what regulation in the system. There is a turf war between the Securities and Exchange Commission, and the CFTC, the Commodity Futures Training Commission.

How that line gets drawn is really important. But that's a bill that's not going to happen anytime soon because the Senate is not playing ball, as Sherrod Brown, chair of the Senate Banking Committee just isn't that interested in crypto at this point. He has other things on his to do list. And he has yet to have a markup of any kind since he took on the Chairman's gavel in 2021.

So I just don't think crypto is going to be the one. And that leaves us with court battles and the SEC. And I want to say, fights like this over novel regulation are actually not all that uncommon in the courts. We saw this in the early aughts when regulators were trying to figure out like what derivatives were and how they fit into the financial system, and whether they should be handled by banks.

Ultimately, national regulators fought to say, this is our jurisdiction actually. And state regulators, get out of our way. We're going to handle derivatives. And that's partly why the financial crisis happened. But all to say, this is what often happens when you have a body like Congress that moves very slowly. That's not news to any of you or probably to any of our listeners. But it bears repeating that it really can take a long period of time.

BRAD SMITH: Where is the alignment settling among representatives as it comes to crypto from what we've seen right now, Brendan?

BRENDAN PEDERSEN: Great question. I think Republicans, in general, are pretty supportive of the idea of innovation. They say, look, if innovation is going to happen here, we want to support it. We want to keep jobs here. Because something you'll hear crypto folks say a lot is, well, this regulatory environment here in the US isn't so great. We're going to move overseas. I'm personally skeptical of that because we have some of the finest workforce and capital markets in the world. There's a reason that crypto firms are trying to start off here.

With all that said, Democrats have become a lot more skeptical since last fall when FTX collapsed. And I've just seen that opposition calcify. When you're talking about the most powerful Democrats in financial services, Maxine Waters, the former chair of the House Financial Services Committee. Stephen Lynch, who is the subcommittee ranking member of the digital asset subcommittee. He's a crypto guy. They're really skeptical of even the need for Congress to legislate. Never mind what that legislation might look like.

So there's a pretty big gap here. And, ultimately, it might be stuff like this court legal action. If the SEC either triumphs or loses, that might be what kicks Congress into gear and is thinking more seriously about legislation. But for now, we're not there.

JULIE HYMAN: Brendan, who else might be the target of the SEC? I think immediately of Robinhood. I don't know if all of these tokens for example are available for trade on that site. But are there other companies we should be thinking about?

BRENDAN PEDERSEN: Yeah. I shudder to name other crypto companies that might be up next. Let's just say this. A lot of crypto companies are operating in the same way as Coinbase and Binance. In so far as they are saying, hey, what we're doing is not securities transactions. We are not allowing our customers. Crypto is different. Crypto is not security. Maybe they will argue that crypto is a commodity and will be regulated by the CFTC.

There is a lot of unanimity across the financial crypto sector that is dedicated to not be regulated by the SEC. So if the SEC does crack down on or triumphs over Coinbase and Binance in these lawsuits, I'm pretty sure that just about every crypto outfit should be on notice. Unless, of course, they decide to start complying with securities laws, which I'm sure Gary Gensler would love.

BRAD SMITH: Brendan Pedersen, Punchbowl News financial services reporter, great coverage. And always appreciate seeing what more you have to put out there in your newsletter continuing to track this ever changing environment. Thanks so much.

BRENDAN PEDERSEN: Thank you.