Dissent: Are crypto companies like Binance and Coinbase really wronged by the SEC?

Original Title: SEC and 'crypto'---the first domino

Author: Jerry Chan, Wall Street Technology Expert

Compiled by: bayemon.eth, ChainCatcher

The U.S. Securities and Exchange Commission (SEC) has dominated the digital currency industry news this week, announcing civil lawsuits against the industry's largest exchanges, Binance and Coinbase. This move by the SEC has sparked discussions online and even raised questions among some about congressional legislation. While this crackdown on cryptocurrencies is not yet fully determined, it is certain that the long-silent U.S. regulatory agency's sudden action has caused over 76% of liquidity providers in the cryptocurrency market to "retreat." Therefore, regardless of whether Binance and other exchanges have previously acted unscrupulously for profit, most investors will shift their funds to other investment areas due to increased regulatory pressure, and the sudden drop in liquidity will inevitably push them into a dire situation.

But can the SEC add new evidence to the events it had previously kept silent about in this new round of investigations? Many cryptocurrency investors, including some members of Congress, are calling the SEC's charges unjust. This is also the main defense argument put forth by Ripple in its own lawsuit, claiming that the SEC did not timely inform them that their main business was illegal. So, should the SEC's past silence also be held accountable for the current chaos among exchanges?

To answer this question, we need to understand the nature of regulation, the formation and powers of the SEC, and the different types of regulation.

Definition of Regulation

Regulation is a means by which the government ensures that private enterprises conduct business in a certain way or move toward a specific social or political goal. It is one of the ways the government manages businesses and a set of standards and rules established by regulatory agencies to enforce laws.

Formation and Powers of the SEC

The SEC was originally established to address the massive economic turmoil following the stock market crash of the early 1930s. The rampant speculative market and stock fraud of the 1920s led to an increasing concentration of wealth in the hands of "Gatsby-like" financiers, resulting in excessive leverage and inflation in the global economy. To establish and enforce rules to prevent such disasters from happening again, then-President Franklin D. Roosevelt signed the Securities Exchange Act, creating the SEC. The mission of the U.S. Securities and Exchange Commission is to regulate all participants in the securities markets to protect individual investors. Simply put, their established mission is:

1. To ensure that securities selling companies must accurately disclose their business, the securities they sell, and the risks involved.
2. That companies selling and trading securities must prioritize the interests of investors and treat them fairly and honestly.

Different Types of Regulation

Having understood the SEC's mission, let us turn our attention to the different types of regulation.

1. Regulation by Command and Control

   This approach refers to regulatory agencies precisely defining and stipulating what the regulated parties need to do when conducting business. This method is also known as "method-based" regulation. An example of this is the Nuclear Regulatory Commission, which precisely specifies the types of equipment that can be used and the processes that must be followed to support the operation of nuclear power plants. While this is very effective in ensuring public safety, it is often criticized for being too costly and stifling innovation.

2. Performance-based or Goal-based Regulation

   In this model, regulatory agencies aim to set a goal, such as carbon emission targets, and allow industry participants to make efforts toward that goal in ways they deem appropriate.

   This approach allows for maximum innovation, but is only suitable when the goals are easily quantifiable and measurable. When the expected goals or behaviors are too vague to serve as performance metrics, other forms of regulation must be resorted to.

3. Management-based Regulation

   Under this regulatory system, the industry has its own standards, and regulators only participate in helping the industry develop the processes and guidelines they will adhere to. An example of this is the Hazard Analysis and Critical Control Points (HACCP) method used by the U.S. Food and Drug Administration, where food producers are tasked with identifying potential risks their processes pose to public health and how to minimize those risks. However, the challenge of self-regulation is that government agencies often find it difficult to assess the effectiveness of the procedures and rules that the industry may propose. The advantage, however, is that from a tax perspective, it is the most cost-effective of all regulatory methods.

4. Regulation by Enforcement

   This is also the regulatory model adopted by the SEC. In this model, regulatory agencies do not establish clear operational rules for businesses but allow them to operate within the boundaries of guiding rules. Enforcement regulation allows, and even encourages, industry innovation, but also prevents businesses from "going rogue" and replicating the "roaring twenties." The SEC operates under this regulatory framework, imposing severe penalties on businesses or individuals that violate its established guiding principles.

Therefore, the claim by Ripple, Binance, and other companies that the SEC did not clearly inform them of what they could do is quite absurd. Because the SEC essentially does not regulate by command and control, but punishes businesses that violate SEC regulatory principles after having sufficient evidence and explains the truth to investors.

The only argument from digital currency industry practitioners is that since "Crypto" and "Security" are completely different words from a spelling perspective, they logically cannot be considered a security, cannot pass the Howey test, and thus are not bound by SEC regulatory provisions. This is analogous to the origin of duck typing in programming:

"If it looks like a duck and quacks like a duck, then it is a duck."

I believe that many exchanges in the digital currency space have been reluctant to spend money on legal advice, instead only hiring lawyers who tell them what they want to hear, and they will soon find that these arguments do not hold up in court. Given that many individual investors lost their life savings after the collapse of the digital currency market, and some even committed suicide, I believe the courts have a moral obligation to constrain these exchanges to comply with the same rules as traditional securities firms, which seems to be the most reasonable outcome we can expect.