After the SEC's "rectification", is there still a gray area in encrypted assets?

Last week, the SEC officially announced the indictments against Binance and Coinbase. Some people finally hope that the regulatory authorities will officially intervene in various gray areas. Some people think that related trading platforms can provide better investor protection. Some people think that platforms and institutions should work together to maintain The ecological balance of the virtual asset market…

As for the scale of future supervision, let’s listen to the analysis of Sister Sa’s team.

Leaving aside the "selfishness" of SEC or CFTC prosecution, let's first look at the potential risks of unregulated virtual asset trading platforms:

One-handed trading, one-handed market making: Exaggerated trading volume, false liquidity?

The SEC last week filed a number of charges against Binance and Coinbase, including the functions of traditional financial services such as exchanges, brokers and clearing agencies, but failed to comply with the law. Registering these functions with the SEC, and CZ as the actual controller of Binance also violated the relevant regulations on function registration.

It is conceivable that, under the premise of lack of legal regulation and institutional supervision, no matter whether the attribute of virtual currency is identified as commodity or securities or other, when the virtual asset trading platform interweaves transactions, agency, clearing and other businesses, it is opaque A powerful operating system allows it to manipulate the market and rob users.

Take the SEC’s allegations against Binance as an example:

The undisclosed major market maker of Binance.US, Sigma Chain (also owned by CZ), is likely to have carried out targeted wash trading:

CZ directed BAM Trading (the parent company of Binance.US) to take on two market makers he owns and controls, Sigma Chain and Merit Peak, entities run by several Binance employees working under the direction of Changpeng Zhao. Merit Peak will trade on the platform from at least November 15, 2019 until June 10, 2021. Sigma Chain is a frequent spot trader on Binance US until April 2022, and it also continues to act as a counterparty to certain OTC and Convert and OCBS services on Binance US. The activities of Sigma Chain and Merit Peak on the Binance US platform and their undisclosed relationship with Changpeng Zhao and Binance involve a conflict between Changpeng Zhao's financial interests and the interests of Binance US platform customers.

In 2021, at least $145 million has been transferred from BAM Trading to Sigma Chain's account, and another $45 million has been transferred from BAM Trading's Trust Company B account to Sigma Chain's account. From that account, Sigma Chain spent $11 million on a yacht. The SEC implicitly implied that the yacht was purchased by embezzling Binance.US user funds, although no substantive evidence has been provided. These are the SEC's accusations that Binance manipulated the market through wash trading to artificially create the illusion of increased trading volume, liquidity, and trading interest in related assets.

At the same time, the SEC accused BAM Trading and BAM Management of misleading Binance.US customers and stock investors into believing that they had the ability to monitor the market and detect and prevent manipulative trading on Binance.US’s encrypted asset trading volume. CZ’s statement in 2019 that credit is the core competitiveness of the trading platform, and that false trading volume will crush the credit platform provided a landing point for the SEC’s allegations of making false statements and misleading investors. Sound the alarm outside the legally regulated subject.

The liquidity of the virtual platform may be a problem

The collapse of FTX last year has verified the high risk of asset liquidity problems under this business model.

FTX, as a virtual asset trading platform, claims that it has complex and complete risk control measures to protect investors' assets. However, FTX’s largest client is Alameda, a hedge fund actually controlled by FTX CEO Sam Bankman-Fried. The fund was able to partially mask this activity because the assets it traded never touched its own balance sheet. Instead of holding any funds, Alameda holds large amounts of overvalued illiquid assets (such as the token FTT affiliated with FTX). That is, Alameda borrowed billions of dollars from FTX users without any disclosure and evasion of risk reduction measures, and then made high-risk, high-leverage bets, which eventually led to financial injection and collapse. In this case, FTX has plunged the platform into a liquidity trap early by mixing customer assets and illegally embezzling them, and related transactions with Alamdeda.

However, the current situation of Binance and Coinbase may be much better than that of FTX. Not only are there no allegations of financial crimes such as fraud, but the virtual currency market is relatively stable: According to Fortune reports, Coinbase’s stock price was hit this week, falling by about 13%; Bitcoin The price is still trading around $27,000 from Monday to Friday last week, and other major cryptocurrencies are also in more stable trading.

It is difficult for investors to declare their rights according to the law

FTX, Binance, etc. mixed company assets with customer funds to falsify transaction volume, private investment, etc., which undoubtedly made ordinary investors unilaterally bear the high risk of transactions. However, when the platform misappropriates user assets due to fraud or negligence, or freezes user assets due to platform reasons, the legal nature of cross-border transactions and virtual currencies makes the application of the law unclear, and the lack of supervision makes it difficult for investors to have strong funds, The virtual asset trading platform of the global trading network competes and obtains compensation.

Future Supervision Possibilities and Directions

When the U.S. courts ruled on the crimes committed by Binance and Coinbase, the nature of virtual currency is an unavoidable issue. Only when it is judged that virtual currencies are 'commodities' or 'securities', or fall within the scope of other definitions, can the relevant laws be applied.

According to CNBC, Coinbase’s CCO responded to the SEC’s lawsuit in this way: “In the absence of clear digital asset industry rules, the SEC relies on the only law enforcement method, which is harming the economic competitiveness of the United States and has publicly committed to compliance like Coinbase. The company... (faced with regulatory difficulties,) the solution is to legislate fair rules to make the industry more transparent and equitable, rather than litigating (to expand legal interpretation). In the meantime, we will continue to operate our business as usual Business."

According to a statement on its official website, Binance believes that the SEC is trying to unilaterally define the structure of the virtual currency market by labeling certain tokens and services as securities. Instead, the SEC’s move is a rush to compete with other regulators (e.g., the CFTC) for virtual asset jurisdiction, while investor protection is not a priority.

According to the New York Times analysis, US legislators do not all have a sense of urgency to legislate on the virtual asset trading industry, and regulation will also be a long and slow process. Enforcement actions are likely to take place before the relevant legislation is passed, while hot-button issues such as characterization may be decided by the federal courts first. However, from an industry perspective, this indirect path may ultimately succeed. The U.S. Supreme Court has shown a willingness to limit agency power, and cryptocurrency lobbyists are well aware of the implications. In the next term, the justices will reconsider the current doctrine of subordinating the courts to professional institutions, which may further curb executive power.