The US Securities and Exchange Commission (SEC)’s crackdown on Binance and Coinbase risks a global exodus of crypto “regulation refugees,” many of who are poised to move to the UAE, industry experts told CEO Middle East.
Last month saw an unprecedented escalation in the US crackdown on digital currencies, with the SEC suing two of the world’s largest crypto exchanges. This has led many to wonder how it will impact the global Web 3.0 community and if it will, perhaps, make the UAE a more attractive market for exchanges to set up in the Gulf country, which Chainalsysis’ CEO and co-founder Michael Gronager believes is perfectly positioned with the oversight of the Virtual Assets Regulatory Authority (VARA).
“I think there’s a key opportunity for the UAE right now,” he told CEO Middle East. “There’s clearly a momentum and expectation that the UAE will be a good place to operate a crypto business from. There’s a specific regulator created exactly for the purpose of virtual assets which is great and actually creates a lot of clarity and hope from the industry.”
Being in the crypto space since 2011, Gronager said that there have been many cases where exchanges were getting away with probably more than they should have while regulators turned a blind eye, especially in the US, simply because the industry was just “too small to care about.”
“This ritual clean-up hasn’t happened yet, and that is part of a maturing industry so I would say that it will probably happen in crypto and probably for the better more than the worse,” he explained.
Part of why the sector’s regulation in the US is very unclear is due to the fact that the SEC and the Commodity Futures Trading Commission (CFTC) want to own the space, as one claims that crypto is a security and the other claims it is a commodity.
Binance and Coinbase are now facing allegations of failing to register their platforms with the regulator. The SEC charges stem from the debate over whether digital assets should be classified as securities or commodities, an unresolved issue in the evolving crypto sector.
SEC Chair Gary Gensler contends that cryptocurrencies are securities, but House Republicans have proposed assigning regulatory authority to the CFTC instead.
On June 5, the SEC filed 13 civil charges against Binance and its founder, Changpeng Zhao, accusing them of deceptive practices and mishandling customer funds. The SEC’s 136-page complaint alleges that Binance misled investors and regulators and illegally allowed US consumers to trade on its international platforms.
Binance has faced previous regulatory scrutiny from the CFTC and is currently being investigated by the Justice Department for money laundering.
The following day, the SEC sued Coinbase, accusing the exchange of operating as an unregistered broker, exchange, and clearing agency. Coinbase is also criticised for not meeting investor disclosure requirements, with the SEC identifying 13 crypto assets traded on the platform that should have been registered as securities.
“Now we have actual suits going on and there will be cases over the next three to 10 years maybe to figure out where it does land. So it will create clarity but it’s going to take a long time and I think there’s an advantage to be had for Europe and Hong Kong to save the game while the US is figuring it out.”
‘Historic opportunity’ for UAE crypto community
The lawsuits reflect the ongoing debate over whether cryptocurrencies necessitate a unique regulatory framework or should be treated as securities under existing laws. The SEC’s unilateral determination of the classification raises concerns about the agency’s authority without clear direction from Congress.
While crypto firms desire regulatory clarity, they prefer a less stringent approach than that advocated by the SEC. The outcome of these lawsuits may not be as crucial for the SEC as they serve as a leverage tool to establish de facto regulatory standards for the industry.
The absence of a well-defined regulatory framework in the US hampers both consumer and investor protection and stifles innovation. The responsibility falls on Congress to establish comprehensive guidelines and create a unified vision for the burgeoning market that balances regulatory oversight and fosters innovation. As the SEC continues to set the regulatory standard, the window for congressional action is rapidly closing.
This is why Aurora Labs’ CTO, Arto Bendiken, believes that the UAE has a “historic opportunity.”
“On the ground here [in UAE] there is a feeling of a discernible sea change happening,” he told CEO Middle East.
“While we have already previously attracted high-profile residents such as Binance’s CEO and Polygon’s leadership, it is only very recently, indeed this very year, that many Silicon Valley luminaries are making their very first trips to the UAE, disconfirming negative prejudices, and discovering that the UAE has a vitality akin to the Valley in its heyday.”
Having been to several crypto community meetups in the UAE, Bendiken said he has noticed a “steady stream of regulation refugees” from across the world, but namely Americans, which he expects will only continue to grow this year following the SEC crypto crackdown last month.
The consequences of the crackdown are already being felt across the industry, or as Bendiken put it: “There is now a general distasteful feeling, a disgust even, for the regulation-by-enforcement strategy the SEC has embarked on. The political motivations driving this are clear to everyone.”
American crypto companies have now been left with no real options beyond either halting operations or relocating to a friendlier locale. “The UK, Hong Kong, and other top-tier jurisdictions are actively soliciting Coinbase and other refugees of overregulation, and Coinbase are considering their options.”
A silver lining for regulation?
The SEC’s regulatory enforcement actions will have broad implications for other centralised exchanges, but they don’t necessarily need to be perceived as negative, Ronghu Gu, co-founder of CertiK, told CEO Middle East.
They can potentially lead to a more robust and secure environmental for all participants, he explained, as one of the key outcomes of these enforcement actions will be increased regulatory clarity.
“The lack of clear guidelines has led to uncertainty and confusion for businesses operating in the rapidly evolving Web3 ecosystem. This lack of clarity can inadvertently lead to non-compliance or the implementation of sub-optimal security practices,” Gu explained.
“Through these court proceedings, we will likely see a more precise definition of the requirements for exchanges and other digital asset service providers. This enhanced clarity can help exchanges to better understand and comply with their obligations under the law.
“From a security perspective, this can only be a good thing. Clear rules and guidelines mean that exchanges can implement more effective security measures, thereby reducing risks for their users.”
Calls for dedicated US oversight
The SEC seems to have hardened its stance on crypto since the collapse of FTX last year. But its enforcement-based approach risks pushing major crypto companies to seek business opportunities outside the US.
A separate regulatory authority and oversight body dedicated to cryptocurrencies may be a solution to address the unique challenges of this relatively new industry.
“When we now look at the crypto space and how much it’s grown, there’s probably a need for maybe a specific regulator but I think that’s going to take a very long time,” said Chainalysis’ Gronager.
“I think it would be a nice outcome and maybe also a logical one.”
“It’s worth keeping in mind that even if the SEC were correct that their actions will serve to protect the dollar hegemony, that hegemony primarily benefits the US only,” Bendiken said.
“For the rest of the world, it is in our interest to seek safe havens where our savings are not subject to exported inflation as the US continues to print trillions more dollars for their own benefit.”