Updated Aug 30, 2023 - Economy

SEC chair Gary Gensler's court losses are piling up in crypto

Photo Illustration: Aïda Amer/Axios. Photo: Melissa Lyttle/Bloomberg via Getty Images

Gary Gensler's Securities and Exchange Commission has really been faceplanting in the courts lately when it comes to crypto industry enforcement.

Why it matters: The regulated community is liable to smell blood in the water. Companies settle when they believe they will lose in court or that the price of the fight will be too high — but every loss for the SEC makes it less likely the next company it goes after will settle.

Catch up fast: The SEC's most recent loss came on its reasoning to keep Grayscale's giant bitcoin trust from converting to an exchange-traded fund.

  • The federal appeals court for the District of Columbia pointed out several inconsistencies between the commission's decision on exchange-traded funds (ETFs) tied to bitcoin derivatives and Grayscale's proposed product, built on actual bitcoin.
  • The first bitcoin ETF was approved in October 2021, based on bitcoin futures.

Previously, the agency received an arguably more significant defeat in the lawsuit brought by Ripple over the XRP cryptocurrency stewarded by the firm.

  • That decision dealt a blow to the often-repeated position from the SEC that basically all cryptocurrencies are securities.
  • The SEC sought approval to appeal the decision even though the larger case is not entirely settled.

A loss in that case would be a further blow.

Quick take: It's not so much that either of these matters is settled but that each loss indicates weaknesses in the agency's overall analysis.

  • SEC chair Gensler has gone to considerable lengths to make his views seem like simple, common-sense applications of law.
  • When judges disagree, it bolsters the industry argument that the law needs an update.

What they're saying: "The SEC's losses have failed Democrats who care deeply about consumer protection and now have to realize that giving up a seat at the legislative table would be a missed opportunity," Faryar Shirzad of Coinbase's policy team tells Axios via a spokesperson.

What we're watching: Two giant tests loom, the agency's cases against the world's largest crypto exchange, Binance, and its case against the largest exchange focused on the U.S., Coinbase.

  • Both companies have deep pockets and both have evinced a willingness to fight.
  • The SEC filed a very similar complaint against Bittrex that it has against the larger exchanges, but that ended in a settlement with a $24 million fine (which, in crypto terms, is not a lot). On the other hand, Bittrex left town.

The latest: The SEC has already lost one bid in the Binance case. It sought a restraining order to freeze the firm's assets in the U.S. It got a compromise.

  • Yes, but: The SEC just filed a motion under seal, which is unusual. It could mean it's linked to a much larger case, perhaps from the DOJ.

The bottom line: The SEC no longer looks unbeatable.

Crystal Kim contributed reporting.

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