The SEC's actions against Coinbase indicate a regulatory vacuum in the cryptocurrency space

Original Title: SEC's Coinbase Move Signals Regulatory Vacuum for Crypto

Original Author: Yueqi Yang, The Information

Original Translation: Block unicorn

Welcome to the official beginning of the cryptocurrency regulatory vacuum. This is our current situation, as the largest cryptocurrency exchange in the U.S., Coinbase, has stated that it has reached an agreement with staff from the U.S. Securities and Exchange Commission (SEC) to dismiss the lawsuit accusing the company of operating an illegal securities exchange (at least that's what Coinbase claims— we will have to wait for confirmation from the SEC after a committee vote).

Last Friday morning U.S. time, Coinbase's stock price rose by 2.2%. This news sparked significant progress in the cryptocurrency industry regarding regulation, especially after the SEC decided to abandon its long-standing lawsuit against Coinbase, suggesting that the cryptocurrency industry has entered a regulatory vacuum. Coinbase CEO Brian Armstrong stated in a post on X that the dismissal means Coinbase will not pay any fines and will not make any changes to its business, adding that the company has spent about $50 million on this lawsuit.

It seems that top financial regulators are pausing the enforcement of decade-old securities rules related to cryptocurrencies as they await Congress to establish new rules—if Congress can pass any rules at all. These congressional deliberations are likely to take some time. Essentially, cryptocurrency companies have been promised regulatory exemptions while Trump's cryptocurrency task force tries to figure out the next steps for the industry.

While all of this sounds optimistic for the cryptocurrency industry, the situation is not entirely bright. Today we saw some risk warnings facing cryptocurrencies: just two hours after Coinbase released good news, the world's third-largest cryptocurrency exchange, Bybit, confirmed it had suffered a hack exceeding $1 billion, marking the largest hacking incident in cryptocurrency history.

When such hacks occur, panicked investors may withdraw funds en masse, which could deal a fatal blow to exchanges if they do not have enough funds to meet withdrawal requests. Currently, Bybit CEO Ben Zhou stated that the exchange has sufficient funds to cover the hacked amount and is still processing withdrawals normally. Nevertheless, both Bitcoin and Ethereum prices fell, while Coinbase's stock price—which had risen in the morning after news of the SEC's actions—dropped by 8% in afternoon trading.

It may take days or weeks for the situation to clarify, and any chain reactions will only become apparent over time. This hack not only reveals the inherent risks of cryptocurrencies but also indicates that the current protective measures of traditional financial institutions can shield them from cryptocurrency risks. This serves as some comfort for banks and traditional securities exchanges that are still under strict regulation by the SEC and federal banking regulators.

These companies have been arguing that the cryptocurrency industry currently has an unfair regulatory advantage. For example, Nasdaq complained earlier this month during a meeting with the task force, requesting the SEC to set a clear deadline for this "hands-off" status of cryptocurrency exchanges. The exchange giant had previously expressed a desire to launch cryptocurrency services. Banks also wish to offer cryptocurrency services to institutional traders and investors, possibly to avoid losing clients interested in cryptocurrencies to exchanges and trading firms. However, they still need to obtain approval from banking regulators to do so.

This week, a heavyweight coalition of banking lobbyists requested the Trump administration to find ways to ensure they do not miss out on this game. This series of events not only highlights the vulnerabilities of the cryptocurrency industry but also reflects the advantages of traditional financial institutions in terms of regulation and protective measures. As the cryptocurrency market continues to evolve and the regulatory environment gradually takes shape, how to balance innovation and risk in the future remains a question worth watching.