Will US Crypto Crackdown Impact Venture Scene?

In a momentous turn of events, U.S. regulators have taken bold action by filing lawsuits against the world’s leading cryptocurrency exchanges, Binance and Coinbase. This unequivocal move by the Securities and Exchange Commission demonstrates the regulator’s unwavering commitment to asserting control over the crypto industry and enforcing federal securities laws.

The repercussions of these regulatory measures have reverberated throughout the cryptocurrency market, causing significant fluctuations in prices and unsettling investors. However, it is important to recognize that these actions have far-reaching implications beyond the immediate impact on industry giants. They are also likely to send shockwaves through the crypto startup and venture capital ecosystem, as participants grapple with navigating the complexities of an uncertain financial landscape.

Yash Patel, a distinguished general partner at Telstra Ventures with a vested interest in crypto startups, affirms that responsible regulation in this domain is widely welcomed by most crypto firms and venture funds. However, he cautions against a heavy-handed approach focused solely on enforcement through regulation. Instead, he advocates for a more transparent and legislatively clear framework that encourages innovation. The absence of such an approach risks driving not only startups but also established players away from the United States, jeopardizing America’s competitive position as key talent seeks more favorable environments abroad.

In summary, the recent legal actions taken against Binance and Coinbase mark a significant turning point in the relationship between regulators and the crypto industry. While the immediate consequences have been tumultuous, it is essential to approach this situation with confidence and seek a balanced regulatory approach that fosters innovation, protects investors, and ensures America’s leadership in the global crypto landscape.

Tough times for crypto

The cases against Binance and Coinbase exhibit stark differences in their scope and implications.

Coinbase is currently facing a lawsuit from the SEC, which alleges that its prime brokerage, exchange, and staking programs violate securities laws. The complaint further asserts that 13 assets listed on Coinbase’s platform are classified as crypto asset securities.

In contrast, the suit against Binance goes beyond mere violations of securities laws. It accuses Binance and its co-founder, Changpeng Zhao, of operating a complex network of deceit. The allegations state that Binance and Zhao exercised control over customers’ assets on the platform, manipulating and diverting billions of dollars at their discretion, including directing funds to Sigma Chain—an enterprise owned and controlled by Zhao.

Moreover, the lawsuit reveals that Binance.US, initially presented as an independent exchange, was actually under Zhao and Binance’s control. This intricate web of deception amplifies the gravity of the charges against Binance.

These legal actions have emerged against the backdrop of FTX’s substantial collapse—an unprecedented failure that has inevitably heightened regulatory scrutiny within the industry. Notably, the SEC is also pursuing legal action against the disgraced founder of FTX, Sam Bankman-Fried.

Furthermore, the cryptocurrency market experienced a significant downturn last year, although assets such as ether and bitcoin have demonstrated a promising recovery in the current year.

Consequently, these developments have had a chilling effect on the venture market for cryptocurrencies, with a substantial decline in venture capital investment. According to Crunchbase data, global venture capital investment in crypto plummeted from $6.2 billion across 444 deals in the first quarter of 2022 to a mere $1.1 billion across 200 deals in the corresponding period this year.

The situation becomes even more alarming when focusing solely on VC-backed, U.S.-based crypto startups. In Q1 2022, these startups secured $3.8 billion in 189 deals. However, the first quarter of this year witnessed a staggering decline to only $278 million across 73 deals, as reported by Crunchbase.

In light of these developments, it is evident that the cases against Binance and Coinbase have significant ramifications and have contributed to a notable cooling effect on the crypto venture market.

A chilling effect?

The impact of the recent SEC actions on funding and deal numbers remains uncertain. However, industry insiders are cautious about the potential consequences.

VCs have long been advocating for greater clarity, particularly regarding the classification of certain cryptocurrencies as securities or commodities, as discussed previously. The distinction between the two determines which regulatory agency oversees them.

In the ongoing lawsuit against Coinbase, the SEC is essentially treating all crypto tokens as securities, a stance that differs from the historical position of the Commodity Futures Trading Commission (CFTC). This discrepancy has led to considerable confusion about the jurisdictional boundaries between the two agencies.

Patel, an industry expert, asserts that there is a need for regulatory clarity in the crypto space. Although regulation is welcomed, the concern lies in the lack of definitive guidelines.

Lopez, the head of blockchain and digital assets at Cohen & Co. Capital Markets, acknowledges the necessity of regulation in the crypto industry. However, he expresses his apprehension that the United States is lagging behind other jurisdictions like Hong Kong and Europe, which have adopted a more favorable approach towards their crypto communities.

Lopez believes that the SEC’s crackdown could be worrisome for investors. Nevertheless, he predicts that actions taken by other jurisdictions will compel the United States to step up its regulatory efforts, to prevent the loss of innovative companies and entrepreneurs who may consider relocating overseas.

While the SEC’s intentions appear clear, Patel emphasizes the need for thoughtful guidance and well-defined rules from all stakeholders in the regulatory landscape.

He further points out that this lawsuit is not only a legal battle but also a political issue, as there has traditionally been bipartisan support for crypto innovators.


© 2023 CryptoFunding. All Rights Reserved.