First Mover Asia: Will CFTC's Action Against Binance Benefit Crypto’s Asia Narrative?

Good morning. Here’s what’s happening:Prices: Ether is outperforming bitcoin as the CFTC reiterates it should be under its purview, and not the SEC's.Insights: The CFTC's lawsuit against Binance is part of the increasing regulator scrutiny that crypto is undergoing. Will the suit – and other enforcement actions – ultimately help Asia's crypto narrative?PricesEther Up on CFTC Remarks, Bitcoin Flat as Market Digests Binance Suit and Awaits Economic Data

Good morning Asia.

This week is proving to be a tumultuous one for news.

First, Binance was sued by the CFTC over alleged regulatory violations regarding its derivatives products. Next, Sam Bankman-Fried faces another indictment regarding allegations of bribing officials in China, making some wonder if this will damp Beijing’s mood toward the asset class, and finally, to bring it back to the CFTC, its Chair Rostin Behnam reiterated Tuesday during a hearing that he believes ether is a commodity.

How’s crypto reacting to this?

Bitcoin is trading flat, up 1.6% in the last 24 hours to $27,302. Ether is up just under 4.3% to $1,778.

Given that the CFTC reiterated once again, before Congress, that it believes ether is a commodity – and not a security like the SEC would have – tokens in its orbit are also well in the green.

Staking provider Lido saw its token rise by over 12% to $45.81, and Lido staked ether is outperforming ether at on-day gains of 6.5%. Meanwhile, on-chain derivatives exchange GMX’s token is up by 8.7%, perhaps because traders are looking for derivatives infrastructure they believe is beyond the reach of the CFTC (though decentralization, historically, hasn’t been a great defense).

Layer 1 and layer 2s are also in the green, with Solana at 3.5%, Polkadot at 3.6%, Cardano’s ADA at 6.6%, and Polygon at 4.3%.

InsightsThe CFTC Cracks Down. Will Asia Benefit?

The U.S. Commodity Futures Trading Commission's (CFTC) Monday action against Binance was a surprise to some and an annoyance to many.

Sure, traders who use Binance, like the U.S.-based prop shops with offshore accounts, holders of its BNB token, are some of the people who are annoyed.

But more importantly, it's those who want the U.S. to develop a comprehensive framework for crypto and stop ruling by enforcement.

In 2020, calendar years ago but centuries in crypto time, U.S. Rep. Tom Emmer (R - Minnesota) introduced the Securities Clarity Act, which sought to create a new legal category called “investment contract asset.”

“This new term would refer to any asset sold as part of an investment contract that would not be considered a ‘security’ but for its sale as part of an investment contract,” was how it was described in a September 2020 statement on Emmer’s website.

Effectively, it was a framework for crypto similar to what the Monetary Authority of Singapore has developed, or what authorities in Hong Kong and Taiwan are also working on: rules made in the 2020s for an asset class of the internet era, not relying on an interpretation of a court case from 1946.

“The fact remains that digital assets like cryptocurrencies do not fit neatly into the SEC’s regulatory framework,” Bo Howell, an Ohio-based securities lawyer, wrote in a January 2022 post explaining the contested authority over crypto.

Instead, we have regulation by enforcement. Attempts to dictate things via court rulings, not a rulebook to which all parties have access.

In March, Coinbase asked for just that: rule-making.

As part of a legal proceeding concerning an ex-Coinbase staff member accused of insider trading, the SEC is attempting to establish a comprehensive definition for securities that encompasses the majority of cryptocurrency tokens, by pursuing securities fraud allegations against the former employee.

“The SEC’s suit rests on the erroneous premise that the seven Coinbase-listed assets identified in its complaint are ‘securities.’ But Coinbase does not list any securities on its platform,” an amicus brief Coinbase filed as part of the case in March reads. “The SEC posits that the digital assets qualify as securities because they are “investment contract[s], but the assets lack both essential attributes of that statutory term: They are neither contracts nor investments.”

Something similar happened in December. The SEC made the case that FTX's exchange token, FTT, is a security as part of a complaint against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison. The duo are pleading guilty and looking to cooperate with authorities, meaning the SEC's allegations won't be tested in the adversarial environment of a courtroom.

The SEC hasn’t given Coinbase – or any other exchange – anything close to the rulebook they've asked for. There’s no official code to read; lawyers instead have to interpret court filings and read the tea leaves on possible interpretations.

“This ongoing and ever-changing regulatory environment hinders well-designed compliance and regulatory plans,” Braden Perry, a former attorney for the CFTC, said in a 2020 interview.

His analysis still holds true today.

“The last thing any industry wants is what the SEC and CFTC have done: regulation by enforcement, in which agencies decide that some practices should have been illegal, [and then] go back and prosecute the people who were doing it before,” he continued.

In a January 2023 interview with CoinDesk, Rep. Emmer said that more legislation is coming. The right kind, hopefully, and not the stuff that drives an industry offshore.

“We’re going to focus obviously on legislation, and I think it’s going to be to place key guardrails around the industry,” Emmer said. “Market structure guardrails. Stablecoin guardrails. Things like that.”

Right now, this seems bullish for Asia. China’s state-owned banks are soliciting crypto business in Hong Kong, something that would be unheard of or even considered absurd for its sheer unlikeliness if mentioned years ago.

But this is crypto. Stuff moves fast. Can America keep up? Maybe it's not a bad thing if the industry moves to Asia.