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Opinion | A legitimate cryptocurrency exchange in the United States may never exist


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    Can anyone run a cryptocurrency exchange in the United States? I don’t mean run one well, but just run one at all. Last week, the Securities and Exchange Commission filed suit against two major crypto exchanges, Binance and Coinbase. The latter, especially, is worth paying attention to, because if Coinbase can’t operate a legal crypto exchange in the United States — and the SEC is pretty much suggesting it can’t — then it’s hard to imagine anyone else can either.

    After all, Coinbase, the largest crypto exchange based in the United States, is the goody-two-shoes of its industry. Sure, this Boy Scout has somewhat worryingly chosen to hang out behind the gym with the weed dealers and the kid who just got released on bail after stealing the principal’s car. But Coinbase itself doesn’t make much trouble.

    While Sam Bankman-Fried and his pals at FTX were finding ever-more-flamboyant ways to make billions of dollars disappear, Coinbase seems to have boringly used customer funds to buy crypto and hold it for them in the electronic equivalent of a locked vault. The company’s financial statements are audited by Deloitte, not some recent graduate of Uncle Manny’s School of Accounting and HVAC Repair. It even had the SEC’s permission, since April 2021, to list its shares on the Nasdaq.

    Only not so fast, says the SEC. Last Tuesday, the commission filed a lawsuit against Coinbase, alleging that the company was … well, actually, doing pretty much what it told the SEC it was going to do when it asked for permission to list its shares. But now the SEC says this amounts to operating an illegal securities exchange. Which raises some questions.

    For instance, if Coinbase’s business is illegal, why did the SEC allow the company to list its shares?

    And if Coinbase’s operations are illegal, then is it even possible to have a legal crypto exchange in the United States?

    To answer the second question first: No, probably not, at least not in the way that cryptocurrency exchanges normally work, which is by both storing and trading crypto for customers. Securities exchanges cannot hold securities; all they can do is, you know, help customers exchange them.

    If courts side with the SEC, then perhaps Coinbase could survive by splitting the storage and trading functions into two separate firms, or maybe by trading only bitcoin and ether, which don’t seem to meet the SEC’s definition of a security. But it’s not clear that’s a viable business model, or whether the SEC is actually interested in finding a way for crypto exchanges to operate legally. Which brings us to the other question I posed: Why now?

    It’s true that the SEC never technically said Coinbase’s operations were legal when it let the company go public. But it’s a weird argument to say, “Just because we’re letting you be a public company, don’t think we’re saying your business is legal.” If the Sinaloa cartel tried to list on the New York Stock Exchange, would the SEC let it do it as long as the auditing and disclosure requirements were met?

    Presumably not. So what gives?

    Well, even if you think trading crypto is illegal, it’s not quite the same kind of illegal as selling fentanyl on the street. Congress deliberately outlawed drug dealing, whereas crypto simply wasn’t contemplated by our venerable securities laws. It’s not crazy that in 2021 the SEC was willing to take a wait-and-see approach to regulating a novel financial product.

    Days after Coinbase began trading, however, a new SEC chair arrived who is less friendly to crypto — in part because the folks gathered behind the gym turned out to be even more unsavory than the authorities had suspected. There was the theatrical FTX implosion, and there were numerous smaller incidents. By one estimate, at least $4.3 billion was lost between January and November last year to crypto hacks and outright fraud, up about a third from the year before.

    But “there seem to be a lot of scams” is an argument for better regulation, not for making crypto impossible to trade. A bigger issue is that, since 2021, it has become clearer that crypto isn’t delivering real-world benefits to offset its downsides.

    To be sure, in countries racked by hyperinflation, crypto might offer real value by providing a stable medium of exchange. But the United States prints the world’s reserve currency. Only a slim minority of Americans have ever used or traded crypto, and these folks mostly seem to have used it as a form of financial speculation. This means the best you could hope for from even a well-run crypto exchange based in the United States is, basically, an honest casino. Unfortunately for Coinbase, the SEC does not like to think of itself as a high-dollar version of the Nevada Gaming Control Board. It wants to believe the gambles it supervises generate larger economic value.

    It’s still possible that crypto could do so — perhaps artificial intelligence bots will use crypto to transact? But crypto enthusiasts can’t stall regulators forever by coming up with yet another thing it might be good for, someday. Eventually, they have to deliver here and now.

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