SEC’s Gensler goes on the offensive after Binance and Coinbase lawsuits

Securities and Exchange Commission Chair Gary Gensler Thursday went on the offensive Thursday, saying the giant cryptocurrency exchanges targeted by the SEC had "fair notice" before being sued this week.

"When crypto asset market participants go on Twitter or TV and say they lacked 'fair notice' that their conduct could be illegal, don’t believe it," Gensler said in a speech at the Piper Sandler Global Exchange & Fintech Conference.

"They may have made a calculated economic decision to take the risk of enforcement as the cost of doing business."

On Monday the SEC sued the world's largest crypto exchange, Binance, for violating securities laws, mishandling customer funds and misleading investors. On Tuesday it sued Coinbase Global (COIN), the largest US crypto exchange, alleging it also violated securities laws by acting as an exchange, a broker and a clearing agency without registering with the agency.

Coinbase CEO Brian Armstrong pushed back publicly against the SEC, saying the regulator didn't respond to attempts to register with the SEC, work through concerns and get clarity about the rules.

The company’s chief public policy officer, Faryar Shirzad, made the same argument to Yahoo Finance back in March.

“There's no path to registering," he said during the March interview. "We've tried, and there's just no way to do it. And in fact, we've submitted a petition with the SEC [last] June where we enumerated the specific issues that the agency would have to resolve for crypto platforms to be able to come in and register.”

The basis for the SEC’s complaints is that certain crypto assets Binance and Coinbase offered to customers were securities, and therefore under the SEC's jurisdiction.

Securities and Exchange Commission Chair Gary Gensler. (AP Photo/Jacquelyn Martin)

On Thursday Gensler said the SEC provided years of guidance to markets on what constitutes a crypto asset security, pointing to a 2017 report as well as the SEC staff’s “Framework for ‘Investment Contract’ Analysis of Digital Assets” in 2019.

He also said crypto security issuers could file for an exemption from rules, noting that the agency has had rules for decades governing how issuers could do that.

Coinbase has asked for the US to come up with clear rules customized to the crypto industry, but Gensler said Thursday the SEC has already done so.

Existing SEC rules, he said, have been applied to platforms that trade crypto asset securities, including so-called “DeFi” computer systems. He also cited a proposed rule updating the SEC’s investment adviser custody rule to cover all crypto assets and enhance protections.

Gensler also reiterated that the vast majority of crypto tokens already meet the investment contract test, pointing to securities laws enacted by Congress that define a security as well as the so-called Howey Test that emerged from a 1946 Supreme Court case.

“Again, these crypto entities know the rules,” said Gensler. “As Binance’s chief compliance officer put it bluntly to a colleague in 2018, “[w]e are operating as a f-ing unlicensed securities exchange in the USA bro.”

Gensler added that “not liking the message isn’t the same thing as not receiving it…more than 100 Commission orders, settled actions, and court decisions also have made clear when the offer and sale of a token is a security.”