“The SEC’s approach is wrong, and I think that they’re already paying for it,” stated Dr. Zvi Gabbay, a partner and the head of the Capital Markets Department at the Barnea & Co. law firm, in a critical commentary on the US Securities and Exchange Commission’s (SEC) current strategy in dealing with the cryptocurrency market.
This sentiment, expressed in a two-part interview with Finance Magnates, comes in the wake of the SEC’s aggressive legal actions against key players like Coinbase, Kraken, and Binance, despite their notable loss against Ripple.
Gabbay’s remarks reflect the growing tension between the regulatory body and the crypto industry. He added, “What’s amazing is that even though they’re paying for it, they go ahead and file a complaint against Kraken, which basically shows that they’re not hearing the message.”
This unfolding scenario highlights a significant battle, with the SEC on one side and, seemingly, the entire cryptocurrency sector on the other, casting doubts about the future alignment between regulatory efforts and industry interests.
“A Terrible Loss”
Dr. Gabbay started his career as a prosecutor for the Tel Aviv District Attorney’s office. Later, he received the equivalent of a PhD in law from Columbia University. During his time in New York, he specialized in defense work related to the SEC, CFTC, and DoJ. Upon his return to Israel, he assumed the role of Head of Enforcement at the Israel Securities Authority. Subsequently, he transitioned into private practice focusing on capital market financial regulation and enforcement.
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 has been a succession of legal battles between crypto entities and the SEC, and, referring to the Commission being denied, in October, an interlocutory appeal in its case against Ripple, Dr Gabbay explained: “Maybe to the average reader these are not dramatic decisions, but when I’m looking at the legal war in general, these are battles that matter a lot. This loss is a terrible loss for the SEC.”
And, it appears that courts and federal agencies that are usually inclined to side with regulators are not doing so when it comes to the SEC’s position on crypto.
“The SEC is doing things because they believe that they’re right and they believe that’s the way to do things. But, you see they’re running into these little counter positions from other arms of government … there are other federal agencies that are not on board. There are courts that are not necessarily on board, and half of Congress is also not on board.”
There is also the issue, for crypto firms, of reputational damage, or the lack of it, from fighting the SEC.
“[The SEC] settles the vast majority of their cases because defendants – this could be companies or individuals – either can’t afford or don’t want to pay the legal fees for the battle. And, more importantly, in many cases, they don’t know if they’ll be able to stay alive, in that you’re poison once you have these types of proceedings [against you] … but Coinbase, Kraken and Binance are fighting for their lives. There is no alternative, and because there is no alternative, they’re going to fight.”
Gabbay. Pic: Yariv Dagan/The Israeli Association of Publicly Traded Companies
Furthermore, the big crypto platforms may have an advantage in terms of legal personnel and tactics.
“Their legal teams are comprised of former heads of the SEC enforcement division. And, with Ripple, it’s a former chairman of the SEC. It’s super senior people. In many cases, these are stronger legal teams than the SEC’s team.”
“So you’re talking super strong defense, together with the fact that [the crypto companies] have to fight, together with the fact that when [the SEC] embark on regulation by enforcement, you make mistakes and you’re forced to take positions that are legally weird, uncomfortable, and not persuasive.”
“The combination of these three factors leads me to believe that the SEC’s chances of winning are not the usual chances that they’re used to.”
Having said that, Dr Gabbay also explained the possible necessity for both regulators and crypto firms to accept compromises: “Binance paid the money they did [a $4.3 billion fine in November] so that they can continue doing business, and that’s a mighty big commitment to the business. So, if at the end of the day, they can avoid a legal battle and in exchange have a legal regulatory path to continue doing business in the United States,
