The SEC is not going to take a rest, by the looks of it, from trying to exert some control over the crypto exchanges operating on U.S. soil. The regulatory body filed a lawsuit in November against the crypto exchange Kraken for working as an unregistered security exchange. The ongoing legal clash between the SEC and Kraken is now shaping up to be another instance where the SEC is looking to attempt to assert some control over an industry that challenges the conventional regulatory approach.

The jury is still out on whether this is an effective or productive approach by the SEC to try and rightfully regulate the crypto industry or if the regulatory body fails to understand the essence of cryptocurrency and how it operates outside the conventional norms of the traditional financial sector and therefore shouldn’t be treated the same.

Industry experts perceive the SEC’s approach towards regulating crypto exchanges as an outdated approach that shows their lack of understanding of how the crypto exchange operates, particularly platforms like Kraken that offer a diverse range of digital assets that don’t normally fit into traditional securities framework. Misclassifying these assets as unregistered securities reveals a fundamental misunderstanding of the unique characteristics of cryptocurrencies that are decentralized assets.

The most significant issue in all the incidents involving the SEC suing a crypto exchange is that there is no technological neutrality, which means that the regulatory framework for all forms of technology is not equal. The SEC is showing favoritism to one while not willing to accept the other. Forcing cryptocurrencies into traditional securities molds not only misapplies laws but also indicates a bias against digital assets. The lack of neutrality by the SEC is hampering innovation and is also unfairly targeting platforms that are trying to work within the regulatory landscape.

What should be the cause of concern for the stakeholders that are pro-crypto within the U.S. is that the aggressive stance by the regulatory authority will create a risk of businesses planning to move their operations away from the United States to more crypto-friendly jurisdictions.

The phenomenon where such an incident takes place is termed regulatory Arbitrage. Regulatory Arbitrage is a business practice that exploits differences in regulatory requirements between different jurisdictions to gain a competitive advantage. For example, a company might choose to locate its operations in a country with lower taxes or less stringent environmental regulations.

If companies do agree that the current regulations in the United States are not conducive to carrying out their operations effectively inside the country, then it would be prudent for them to move elsewhere, which would see the U.S. losing its position as a leader in technological innovation. The crypto industry operates globally, and excessive regulation in one country prompts businesses to relocate, taking their economic benefits and innovations elsewhere.

List of some Crypto Exchanges that the SEC has sued in the past, including Kraken

The U.S. Securities and Exchange Commission (SEC) has accused several crypto exchanges of operating as unregistered securities exchanges, including:

1. Coinbase: In June 2023, the SEC charged Coinbase with operating as an unregistered securities exchange and broker, alleging that at least 13 crypto assets traded on the platform were “crypto asset securities” under federal law. The SEC also alleged that Coinbase’s staking program, which allows customers to earn rewards by staking their crypto assets, was an unregistered security.
2. Kraken: In November 2023, the SEC charged the Kraken exchange again with operating as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC also alleged that Kraken misused its customers’ crypto assets and cash reserves with its holdings and that it failed to maintain adequate internal controls and recordkeeping practices.
3. Bittrex: In December 2022, the SEC charged Bittrex with operating as an unregistered securities exchange, broker, and dealer. The SEC also alleged that Bittrex failed to properly register its platform with the SEC, failed to implement adequate anti-money laundering (AML) and know-your-customer (KYC) procedures, and failed to disclose its relationships with certain market makers.
4. Binance: In September 2022, the SEC issued a Wells notice to Binance, alleging that the exchange was offering unregistered securities in the form of its Binance USD (BUSD) stablecoin. Binance subsequently ceased offering BUSD to U.S. investors.
5. Poloniex: In 2019, the SEC charged Poloniex with operating as an unregistered securities exchange and failing to register its digital asset trading platform with the SEC. Poloniex settled the charges by agreeing to pay a $10 million fine and to document its platform with the SEC.
6. Gemini: In 2018, the New York Attorney General’s Office (NYAG) issued a subpoena to Gemini, alleging that the exchange was operating as an unlicensed money transmitter. Gemini settled the investigation by agreeing to obtain a BitLicense from the NYAG.
7. Bitfinex: In 2019, the NYAG issued a subpoena to Bitfinex, alleging that the exchange had engaged in illegal wash trading. Bitfinex settled the investigation by agreeing to pay a $1.5 million fine.

The lawsuit against Kraken is poised to be another instance of the SEC’s struggle to regulate the crypto industry effectively, similar to its actions against Coinbase. This recurring pattern of aggressive and ill-informed regulation is not only futile but also detrimental to the SEC’s credibility. It suggests that the regulatory body is more interested in asserting its authority rather than in comprehending and adapting to new technological paradigms.