‘Crypto is dead in America.’ How FTX’s collapse instigated a Biden crackdown on the digital-asset sector.

“Coinbase does not take any litigation lightly, especially when it relates to one of our regulators,” wrote Paul Grewal, chief legal officer at Coinbase, in a blog post announcing the lawsuit.

Financial regulation expert Todd Phillips argued on Twitter that the lawsuit will not succeed because the initial petition was filed only nine months ago — a very short amount of time for the federal regulatory apparatus — and because the best Coinbase can hope for is that the SEC denies the petition.

As a legal strategy, Coinbase’s motion may not look particularly compelling, but it may well be an effective strategy for rallying demoralized supporters of the cryptocurrency industry.

The lack of morale among crypto boosters was on display over the weekend when longtime bitcoin booster and billionaire investor Chamath Palihapitiya declared that “crypto is dead in America,” in response to a recent spate of regulatory actions against the industry, including the SEC sending Coinbase a “Wells notice” that signals the agency’s intention to bring an enforcement action against it.

Read more: Coinbase stock sinks 16% after crypto exchange discloses SEC warning

“The United States authorities have firmly pointed their guns at crypto,” said Palihapitiya, who once predicted that bitcoin
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would reach $200,000.

Crypto startups “were probably the ones that were the most threatening to the establishment,” he added during an episode of his podcast. “They were the ones that in fairness to regulators did push the boundaries more than any other sector of the startup economy. So yeah, the bill has come due for them.”

Greg King, founder and chief executive of the crypto investment firm Osprey Funds, which manages about $120 million in assets, said in an interview with MarketWatch that the failure of crypto exchange FTX in the fall was a watershed moment that “really cooled a lot of receptivity, especially on the Democratic side of the aisle” to the crypto industry.

Rep. Maxine Waters of California, the top Democrat on the House Financial Services Committee, said in a hearing last week that following the collapse of FTX and other failures in the industry, she has withdrawn her support for a bipartisan bill regulating stablecoins, saying that “we’re starting from scratch,” on the legislation despite her feeling that a bill regulating stablecoins is necessary.

Stablecoins are a type of cryptocurrency that pegs its value to government-backed currencies like the U.S. dollar
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and are used by crypto traders to store undeployed assets. The vast majority of trades for cryptocurrencies like bitcoin and ether
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-1.65%
involve a stablecoin, according to the Federal Reserve.

As recently as May, the Biden administration was much more balanced in its pronouncements on crypto. The industry cheered an executive order on digital assets that directed federal agencies to “harness the potential benefits of digital assets and their underlying technology.”

Since that time, the Treasury Department has focused mostly on perceived threats crypto poses to the government’s efforts to stop money laundering and the funding of illicit activities like terrorism and drug trafficking.

Last August, the Treasury Department sanctioned Tornado Cash, a decentralized finance (DeFi) protocol that enables users to obfuscate transactions on the Ethereum blockchain, for its alleged role in helping North Korean hackers launder illicit proceeds.

The move was lambasted by crypto supporters as an abuse of a law that allows the Treasury to block U.S. persons from transacting with sanctioned foreigners or foreign entities.

Earlier this month, Treasury published a 40-page report outlining the threats it sees posed by such DeFi services, recommending that the U.S. government beef up its supervision and enforcement against digital asset companies that facilitate money laundering and terrorism financing activities.

President Joe Biden’s annual Economic Report of the President, issued in March, also contained an entire chapter aimed at refuting claims that digital assets have brought benefits to the U.S. economy.

“There was a lot of optimism about what was going to come from the executive order and hope that it served as an indicator that the administration wanted to embrace the technology and establish clear rules of the road that would protect investors and consumers,” Brett Quick, head of government affairs for the Crypto Council for Innovation, told MarketWatch. “Unfortunately that’s not what we’ve seen more recently.”

Quick says there are still those in the Biden administration, like Commodity Futures Trading Commission Chairman Rostin Behnam, who have taken a more friendly approach to the industry, but that these overtures are moot given SEC Chairman Gensler’s increasingly aggressive stance.

Miller Whitehouse-Levine, chief executive officer at the DeFi Education Fund, a DeFi advocacy organization, sees that Gensler’s attitude toward the sector shifted markedly early last year, when he stopped advocating for Congress to pass legislation “to prevent transactions, products and platforms from falling between the regulatory cracks,” as he did in an August 2021 speech.

To be sure, Gensler’s speech that day was consistent with more recent pronouncements that the law is clear when it comes to which digital assets are securities and which are not, though the regulator has grown more strident in his criticism of the crypto industry.

““I’ve been around finance for 40 years, in one way or the other,” Gensler said in a hearing last week. “I’ve never seen a field that is so noncompliant with laws written by Congress and confirmed over and over again by the courts.”

Whitehouse-Levine believes that Gensler has been emboldened by the failure of FTX and its effect on Democratic lawmakers and administration officials, in light of FTX founder Sam Bankman-Fried’s high profile donations to Democratic lawmakers. (Bankman-Fried said in an interview following his downfall that he gave to both parties, but was not public in his donations to Republicans).

“I don’t think Gensler has become more motivated by the collapse of FTX,” he said. “I think he no longer faces any opposition of his agenda to ban crypto in this country at a level that he did before the collapse of FTX.”

Gensler has denied wanting to ban crypto in public hearings with lawmakers, and that he is simply trying to protect investors and create a level playing field between crypto companies and those that raise money in traditional financial markets.

“Congress gave the commission a mandate to protect investors, regardless of the labels or technology used,” Gensler told the House Financial Services Committee last week.  “Nothing about the crypto markets is incompatible with the securities laws.”