Regulatory frameworks exist for a multitude of reasons. They create a level playing field that prevents organizations gaining unfair advantages, serve to enable enforcement to act as a deterrent for unwanted activities, and instil confidence from within the regulated industry itself, in governments, and in the public.
Recent legal action taken by the Securities and Exchange Commission (SEC) against cryptocurrency exchanges Coinbase and Binance, alongside comments from SEC Chair Gary Gensler, have raised interesting questions about the future of regulation and enforcement when it comes to crypto, and the effects that near-instantaneous communications can have across the digital landscape.
On June 5, 2023, an SEC document filed in the District of Columbia Federal Court alleged that Binance and its CEO Changpeng ‘CZ’ Zhao had a “blatant disregard” for federal securities laws and “enriched themselves by billions of U.S. dollars while placing investors’ assets at significant risk.” As well as leveling 13 civil charges against Binance, on June 6, 2023 the SEC filed an action against Coinbase, charging the company with acting as both an unregistered broker and an exchange. This also comes in the wake of SEC sanctions being levied against other exchanges, including Kraken and Bittrex earlier in the year.
The increasing scrutiny on the crypto market from the SEC is nothing new. Gensler has previously stated his view that:
“This is an asset class that belongs inside public policy frameworks of looking after investors, guarding against illicit activity, thinking about how to facilitate capital formation. It’s just getting too large to leave it off the grid.”
By looking to put in place regulations that identify cryptocurrencies and activity around them as relating to securities, Gensler is hoping to bring much-needed clarity around compliance and investor protection:
“The investing public has the benefit of U.S. securities laws. Crypto should be no different, and these platforms, these intermediaries, need to come into compliance.” Indeed, Gensler has gone as far as to say that the entire crypto industry is “built on non-compliance.”
You know the rules, and so do I
This apparent crusade against crypto has not sat well with everyone. In April, Coinbase took the SEC to court in an attempt to compel the agency to provide more clarity around the regulation of cryptocurrencies. This was after providing the SEC with a survey in July 2022 concerning ‘the regulatory treatment of digital asset securities’ – a survey the SEC did not respond to.
Coinbase’s Chief Legal Officer Paul Grewal spoke out about the need for this action:
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness, and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation.”
Gensler has responded to accusations of a lack of clarity around the rules by stating that “the rules have already been published” to enable crypto companies to remain compliant with federal law, and offered an olive branch to crypto organizations holding securities on their platform by saying that the SEC “stands ready to help them to come into compliance.”
Cause and effect
Amid the regulatory bun fight, another issue has come to the fore namely the cause and effect of near-instantaneous communications – both the expected and the unexpected.
As a result of the actions taken against Coinbase and Binance, and the communications around these, there were anticipatable ‘ripples’ across the market. Binance’s native BNB token dropped sharply on the news of the SEC’s filing, with Coinbase’s stock similarly falling by 9% on the same day – before the suit against Coinbase was even announced.
A fall in the value of the affected exchanges was to be expected. But there also seems to have been a degree of ‘guilt by association’. The SEC’s summary of the actions against Coinbase and Binance namechecked several altcoins, describing them as “unregistered securities”, triggering a drop in value. Algorand and Flow fell more than 60% from their previous highs in February, reaching all time lows, and proving the impact of perception when it comes to crypto and regulatory clarity.
New channels, new risks
Digital communications channels – combined with digital banking services – now mean individuals and markets receive, and can react to, information in near real time. As the debate around crypto and regulation plays out in the media sphere, parallels can be easily drawn with other recent market turbulence.
While perhaps not as ‘high profile’ as Kylie Jenner’s infamous tweet that wiped $1.3 billion off Snapchat’s market value in 2018 (though more publicized than her sister’s own run-in with the SEC), the recent collapse of Silicon Valley Bank is a cautionary tale of the impact of digital communication on perception, trust, and stability. Communications across social media enabled the bank’s depositors to “instantly spread concerns about a bank run, and technology enabled immediate withdrawals of funding”, speaking to the wider issue of the intersection of digital finance and digital communication and how quickly information (or misinformation) can spread.
With investors able to withdraw, move, and invest faster than ever in reaction to quickly-developing narratives, organizations need to be aware of just how quickly perception can shift, and to prepare adequately. A working paper by Dr Anthony Cookson and a team of global researchers examining the collapse of SVB and social media as a bank run catalyst has highlighted that banks and financial institutions now face “risk that is unique to the social-media era” – and the team “do not expect this risk to go away”.
When justifying the length of time it has taken the SEC to bring actions against crypto exchanges, Gary Gensler explained that “it takes time to do things by the book”. But it takes just seconds for communications to have massive reputational and financial impacts – and organizations need to be aware of, and prepared for, these risks.
Looking ahead, we will likely see a number of actions in the coming year to tackle the new-age of digital finance and digital-communication. Firstly, regulators will need to assess the evolving landscape, and may consider new parameters for social media – especially in the context of financial institutions. In the meantime, high-profile or significant industry figures may need to consider how best to communicate with the markets to avoid sudden runs.
Either way, communication monitoring tools will likely play a pivotal role in understanding and assessing who is communicating, how, and when.