The SEC Is Wrong and They Are Already Paying for It: Regulatory Expert Zvi Gabbay
The SEC’s approach is wrong, and I think they are already paying for it,” explained Dr. Zvi Gabbay, partner and head of the capital markets department at law firm Barnea & Co., in a critical commentary on the US Securities and Exchange Commission’s current strategy in dealing with the cryptocurrency market.
This opinion, expressed in a two-part interview, is a result of the SEC’s aggressive legal action against key players such as Coinbase, Kraken and Binance, despite their notable defeat against Ripple.
Gabbay’s comments reflect the growing tension between the regulator and the crypto industry. He added: “The amazing thing is that even though they’re paying for it, they’re filing a complaint against Kraken, which basically shows that they don’t get the message.”
This evolving scenario illustrates a significant struggle with the SEC on one side and seemingly the entire cryptocurrency sector on the other, casting doubt on the future alignment between regulatory efforts and industry interests.
“A terrible loss”
Dr. Gabbay began his career as a prosecutor at the Tel Aviv District Attorney’s Office. He later earned a doctorate in law from Columbia University. During his time in New York, he specialized in defense work involving the SEC, CFTC and DoJ. Upon his return to Israel, he assumed the role of head of law enforcement at the Israel Securities Authority. He then moved into private practice with a focus on financial regulation and enforcement in the capital markets.
Today, the SEC filed a complaint alleging that Kraken operates as an unregistered national securities exchange, broker, and clearing house. We disagree with their claims and plan to vigorously defend our position. https://t.co/a0C4wzBo3f
— Kraken Exchange (@krakenfx) November 21, 2023
There have been a number of legal disputes between crypto companies and the SEC, and Dr. Gabbay, noting that the commission was denied an interim appeal in its case against Ripple in October, said: ”Perhaps for the average reader these are.” They are not dramatic decisions, but when I look at the legal war in general, these are battles, which are very important. This loss is a terrible loss for the SEC.”
And it appears that courts and federal agencies, which typically tend to side with regulators, are not doing so when it comes to the SEC’s position on crypto goes.
“The SEC does things because they believe they are right and because they believe this is the right thing to do. But you see, they run into these little opposing positions from other branches of government… there are other federal agencies that are not on board. There are courts that aren’t necessarily on board, and half of Congress isn’t on board either.”
Crypto companies also face the problem of reputational damage, or lack thereof, from fighting the SEC.
“[The SEC] settles the vast majority of their cases because the defendants – which can be companies or individuals – either cannot or do not want to pay the legal fees for the litigation. And more importantly, in many cases they don’t know if they can stay alive because you are poison if you perform such procedures [against you] … but Coinbase, Kraken and Binance are fighting for their lives. There is no alternative, and because there is no alternative, they will fight.”
Additionally, the major crypto platforms may have an advantage in terms of legal staff and tactics. “Their legal teams consist of former heads of the SEC Enforcement Division. And Ripple is a former chairman of the SEC. They are super older people. In many cases, these are stronger legal teams than the SEC’s team.
When regulating [the crypto companies] through enforcement, you make mistakes and are forced to take positions that are legally strange, uncomfortable, and unconvincing.” [the SEC] )
“The combination of these three factors leads me to believe that the SEC’s winning odds are not the usual ones they are used to.”
However, Dr. Gabbay also highlighted the possible need for both regulators and crypto firms to compromise: “Binance has paid the money they made so they can continue to do business, and that is a huge commitment to the business. So in the end, if they can avoid litigation and in return have a legal regulatory path to continue doing business in the United States, I think they will use it.”
“And, other regulatory frameworks are being developed: The SEC understands the economic impact when companies move their operations to Europe, Hong Kong or Singapore. And at that point we will already have Bitcoin-based ETFs, so the SEC will get its feet wet in a sense.”
”The third point is the risk of loss. [a $4.3 billion fine in November] are in it for good reasons, they want to protect investors, but if they lose and there is a ruling that says tokens are not securities and the SEC has no business regulation, then the damage is huge… and then you have “These players are subject to literally no oversight, so the consequences of defeat – both for the SEC and for the industry - are enormous, and sometimes agreements are made under these conditions because neither side can afford to lose.”
Dr. Gabbay also made important distinctions between the crypto exchanges involved: “With Binance, the complaint is about a few things: The SEC says, ‘You ran a securities exchange without the proper permits, but you’re not cool about it either.’ Your behavior, you commingled customers’ assets, you embezzled customers’ assets.’
“But with Coinbase and Kraken, that’s not what they say, it’s a very clear, analytical, regulatory statement: ‘You’re running an exchange and don’t have the proper permits,’ and I think that’s where I think they’ve gone too far.” [The SEC]
SEC vs. the Cryptocurrency Industry
In a Dec. 12 court case Binance denied the SEC’s efforts to incorporate the crypto exchange’s settlement with the Justice Department into the ongoing civil lawsuit. The crypto exchange claimed: “The SEC notice is an improper supplementary pleading that does not identify any new ‘authority’ and instead attempts to introduce new factual information and arguments.” This alone is reason to ignore it.” coinbase-sec
Furthermore, exchanges directly challenge the authority of the SEC. “At the SEC, Binance says, these arguments are irrelevant, we are not regulated by you, we should not be regulated by you because we have never operated a securities exchange.”
Ultimately, Dr. The points raised by Gabbay all point to one core question, namely the question of whether crypto tokens are securities or not.
Ripple distinguished between the clear investments of financial institutions in the company to which she held the Howey test applies and the sales of the token to what we do.” would name the secondary market – on exchanges – to which, in their opinion, the Howey test does not apply, it does not meet the threshold, and so the SEC lost it.”
“So it can be argued, that the Howey test – as used by the SEC to determine whether an asset is a security or not – is not relevant to crypto and that its application may have unintended consequences.” leads to some strange things. For example, one of the Howey conditions is an “investment contract.” The SEC considers the token as such. The judge in the Ripple case, however, viewed this condition as a transaction. A token cannot be both a transaction and the underlying asset of that transaction. This is an analytical error that must be corrected by law and regulation, not by the interpretation of a 1948 court decision.
“Another example can be found in the statements of some senior members of the SEC who said, that this could be the case of a token whose life cycle begins as a security and at a certain point ceases to be a security.”
The most important part of this ruling:
“XRP, as a digital token, is not in and of itself a “contract, transaction[,] or scheme” that embodies the Howey requirements of an investment contract.”
This is a now a matter of law (not up for trial.)
— Brad Garlinghouse (@bgarlinghouse) July 13, 2023
And accordingly: “This is a very worrying and strange analytical position, and if you take strange and “That’s not how you legislate or how you regulate.” [use of the Howey Test]
The SEC declined to comment on Zvi Gabbay’s comments, but referred us to Chairman Gary’s comments Gensler in his testimony and in a speech in which he reiterated his view that crypto markets should be subject to securities regulation.
