GM,

I'm delighted to be back at work. Two weeks ago, I announced that Blocktrend was taking a mid-year break. On one hand, I had already planned a family trip; on the other, I felt the need to rest to prevent fatigue. Towards the end of the break, I couldn't wait to get back to work and discuss recent major events in the crypto world.

Last week, the United States Securities and Exchange Commission (SEC) filed lawsuits against Binance and Coinbase, the world's two largest cryptocurrency exchanges, within one week, causing market panic. Not only that, the SEC cited ten well-known cryptocurrencies as securities in the indictment to substantiate the illegal activities of the two exchanges. The ones with the largest market capitalizations include BNB, ADA, SOL, MATIC, and ATOM, which led to a significant drop in their prices.

These cryptocurrencies are widely circulated in the market. Even the local Taiwanese exchanges, which offer fewer currency options, have them listed. These two lawsuits quickly became the focus of global attention. As the SEC nearly filed the suits against both exchanges at the same time, most online reports mix the two cases together. However, the crux of the two lawsuits is entirely different, and it is not entirely bad news for both parties to go to court. In this article, I discuss what the SEC is suing for and how the exchanges respond? I would like to start with the platypus.

Have you ever seen a platypus? It looks a bit like Psyduck from Pokémon.

In 1798, the platypus was first discovered in Australia. At the time, Australia was a British colony, and people sent specimens of the platypus back to the British Museum for identification to determine what this creature was.

However, the experts at the British Museum had a lot of discussions when they saw the platypus. It had the body of a beaver (or otter?) but the bill of a duck. No one had ever seen this kind of creature, and even its classification was controversial. Some people even thought it was a prank—a trick set up by the sailors in charge of the delivery mission—stitching a duck's bill onto a beaver.

To debunk this trick, experts dissected the platypus specimen, looking for stitches. Unexpectedly, after a long search, no stitches were found. The platypus was born this way. The more people studied the platypus, the more they couldn't explain what kind of creature it was. Biologists found that the platypus is a mammal that lays eggs, it's a kind of "assembled animal."

In biological classification, egg-laying and mammalian are usually mutually exclusive. We are mammals, so we don't lay eggs. But the platypus breaks this rule—it both lays eggs and is a mammal. So biologists had to "admit their mistake" and revise the definition of mammals, and list the platypus as a separate category. Not only the platypus but the echidna is also a mammal that lays eggs. Both creatures evolved more than 200 million years ago.

The reason why platypus and echidna are so unique is not that they are strange, but the result of human beings classifying animals based on limited knowledge. There is a lot unknown about nature's past and the future development of technology. Cryptocurrency can be said to be the "platypus" in the field of technology. For a long time, people have been debating whether cryptocurrencies are commodities (like game virtual treasures) or securities (like Apple stocks). The two are mutually exclusive under current U.S. law and have different regulations to abide by.

Last week when the US SEC sued cryptocurrency exchanges, many people thought it was a life-or-death struggle. But essentially, the SEC is bringing the "platypus" to court, hoping to clarify how it should be classified and who should manage it, which is not a bad thing for the long-term development of the crypto circle. Below, I will discuss Coinbase first and then Binance.

The SEC Accuses Coinbase of "Hanging a Lamb's Head and Selling Dog Meat". The SEC accuses Coinbase of masquerading as a cryptocurrency exchange but actually conducting securities transactions. These transactions fall under the SEC's jurisdiction, but Coinbase has not registered with the authorities, which is clearly illegal. According to the SEC announcement:

Since 2019, Coinbase has made billions of dollars through illegal intermediation of crypto asset securities. The SEC accuses Coinbase of intertwining traditional exchange, brokerage, and clearinghouse services, but not registering these services with the SEC as required by law.

SEC Enforcement Director Gurbir S. Grewal stated: "You cannot simply ignore existing rules because you do not like them or because you prefer different ones: the consequences for the investing public are too significant". Coinbase is fully aware of the applicability of federal securities laws to its business activities but deliberately refuses to comply. While Coinbase's carefully crafted decisions may have earned it billions of dollars, this is at the expense of investors, depriving them of the protection they are entitled to. Today's action is aimed at making Coinbase accountable for its choices.

The original dispute between the SEC and Coinbase is whether the cryptocurrencies listed on Coinbase's exchange, many of which the SEC considers securities, mean that Coinbase is illegally operating a securities exchange and must be penalized.

However, Coinbase's rebuttal is also very strong. They claim that another regulatory authority that supervises derivative transactions — the Commodity Futures Trading Commission (CFTC) — also claims jurisdiction over cryptocurrencies and has even penalized Coinbase and Binance. If commodities and securities are mutually exclusive classifications, then there should be a clear regulatory authority for cryptocurrencies, so that operators know whose laws they should follow.

In other words, two committees of the U.S. government are already confused about who should regulate cryptocurrencies, and operators are at a loss. In the past, the SEC and CFTC only fought for territory behind the scenes, but now the power struggle has come to the forefront, and exchanges are caught in the middle and become the victims. You may find it absurd that the divisions of cryptocurrency regulation among different bodies of the U.S. government are unclear and everyone acts on their own. In fact, even within the SEC, there is no unified answer as to which cryptocurrencies are considered securities.

In 2018, then SEC Chief Financial Officer William Hinman publicly stated in a speech that ETH, which was initially issued through ICO, was once a security, but no longer is, because it is sufficiently "decentralized". Then SEC Chairman Jay Clayton also supported this view and promised to publish a guide on whether cryptocurrencies are securities based on Hinman's classification. However, when a congressman recently asked current SEC Chairman Gary Gensler whether ETH is a security, he remained silent.

Gary Gensler continually emphasizes that U.S. regulations on cryptocurrencies are already very complete. In his view, most cryptocurrencies are securities. This situation is very similar to the "platypus" back then. Experts in the British Museum, in order to expose the "scam", did not hesitate to dissect the platypus, just to find the seams they originally imagined. Unexpectedly, the experts were too confident in themselves and underestimated the diversity of life.

Now the SEC wants to sue the Coinbase exchange, simply to find the "seam" that assembles goods and securities on the cryptocurrency, to expose the scam to the world. The final result is still unknown. Coinbase, on the other hand, keeps urging the U.S. government to establish new laws, rather than insisting on using the judgment method established in 1946 (Howey Test) to determine whether the cryptocurrencies in 2023 belong to securities. At that time, computers were not yet popular, the internet had not yet emerged, and the framework was set by people. Who dares to assert that there are no exceptions?

Coinbase has spent a lot of time trying to persuade the U.S. government, but it seems like playing the lute to a cow. In contrast, Binance's approach is smarter, not spending too much time "educating" the government, but trying to avoid regulation as much as possible, focusing on its own business, but it was still caught by the SEC.

The SEC's accusations against Binance are more convincing than those against Coinbase.

The positions of Binance and Coinbase are entirely different. Binance is neither a U.S. company nor does it intend to spend time persuading the U.S. government on how to regulate cryptocurrencies. It only hopes the government doesn't bother it too much. These thoughts are not a problem if they are kept to themselves, but it could be troublesome if they fall into the hands of the government and become court evidence. According to the SEC's announcement:

SEC Chairman Gary Gensler said: "Through 13 charges, we believe that Changpeng Zhao and Binance have been involved in extensive deception, conflicts of interest, lack of disclosure, and deliberate evasion of legal regulations." Changpeng Zhao and Binance misled investors in their risk control and trading volume, while intentionally hiding the manipulation of trades by the platform operator and its affiliated market makers, and even hiding where investors' funds and crypto assets are custodied and who the custodians are.

They tried to avoid U.S. securities laws through false controls so that they could keep high-value U.S. customers on their platform. The public should avoid investing any of their hard-earned assets in these illegal platforms.

The SEC extensively quoted Binance's internal conversation records in its complaint, claiming that Binance clearly knew that the cryptocurrencies it listed were essentially securities and that it was doing "wrong things", but long evaded regulation by various means. The two most representative conversations are as follows.

The first is a conversation between Binance's compliance officer and team members in 2018, where he bluntly said: "Brother, we are just an unlicensed securities exchange operating in the U.S.!" The second is in 2019 when Binance announced that it would no longer serve U.S. users, but did not want to lose VIP customers, so it hinted to users that as long as they bypassed the IP blockade through VPN and updated their KYC information, they could continue to use Binance in the future.

Just looking at these two conversations, most people would say: "See! Binance is knowingly breaking the law. What is there to argue about?"

The biggest problem with this argument is that it ignores the context of the event - the U.S. government's attitude towards cryptocurrencies is still unclear to this day. The U.S.-born Coinbase can only clash head-on, but for Binance, which operates internationally, it's better to avoid extra problems. This strategy can have an advantage in business, but it may be at a disadvantage in court.

It's not hard to imagine that when the trial starts, Coinbase can produce a stack of documents to prove how they communicated with the SEC to no avail in the past. It's not about breaking the law, but there's no law to follow. In contrast, Binance is at a disadvantage in terms of momentum. Although it is true that the U.S. government does not have clear regulations, their behavior is quite sneaky. Whether it's illegal is still hard to say, but it's just a bit shaky.

This lawsuit can be said to be the most significant case in the history of the crypto circle. In the past, the SEC has filed lawsuits against ICO token issuers and the Kraken exchange, and the final outcome was always a settlement with the defendant paying a fine or going out of business. The undefeated SEC has gained confidence, and Gary Gensler even said that if we haven't lost yet, it means we haven't filed enough cases. It can almost be said that the SEC is testing its jurisdiction through legal proceedings.

Of course, this is not good news for the crypto circle, as not every entrepreneur can afford the high cost of litigation like Coinbase

or Binance. But for industry development, this is an unavoidable path. Just like the experts at the British Museum would probably not have admitted their mistake or revisited the definitions without dissecting the platypus. Exceptions to the rules are indeed rare, but nature never categorized organisms in the first place. Legal regulations should also adjust in response to technology, rather than using existing regulations to limit the future.

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