Venture capital firm Paradigm on Friday launched a scathing attack on the U.S. Securities and Exchange Commission (SEC)—alleging the Wall Street’s top cop has been overstepping its regulatory boundaries. In a show of strong disapproval of the regulator’s tactics, Paradigm accused the SEC of bending the law to its will in its case against Binance, the world’s largest crypto exchange.
In a statement released on Friday, September 29, Paradigm said the SEC is hell-bent on policing the crypto industry—some much so that it is using the allegations against Binance to alter the law, and has been sidestepping even the standard rulemaking procedures.
The SEC’s fixation is with exchanges and decentralized finance (DeFi) platforms that it believes are straying away from the law. In June, the financial watchdog sued Binance for alleged violation of securities law. The SEC claims the company — founded by former burger flipper turned billionaire Changpeng Zhao — operated an unlicensed (read: illegal) exchange and misled investors.
Paradigm emphasizes that the SEC has been targeting several crypto exchanges in the same vein as Binance and fears the agency’s aggressive stance against the crypto industry “could fundamentally reshape our comprehension of securities law in several critical aspects.” In particular, Paradigm voiced apprehension about the SEC’s application of the Howey test.
The Howey test is set of standards that the SEC relies upon to determine whether a transaction qualifies as an “investment contract”. If so, then they are considered a security and are subject to federal securities laws and regulations.
In its amicus brief, Paradigm pointed out that many assets, even though they are actively marketed and traded for profit, are not labeled as securities by the SEC. Examples include gold, silver, and fine art. The brief emphasized that just because an asset can appreciate in value doesn’t automatically make its sale a securities transaction.
According to media reports, USD Coin issuer Circle has also joined the legal battle between Binance and the SEC. Circle argues that stablecoins shouldn’t be considered a security—claiming that people don’t buy these assets expecting to make a profit.
After the collapse of FTX, the SEC has only stepped up its attack on the crypto industry. After suing Binance and Coinbase, the regulator has taken action against stablecoin issuers, as well. Notably, earlier this month, David Hirsch, chief of the agency’s Crypto Assets and Cyber Unit, said the SEC will “continue to bring charges” against crypto exchanges and DeFi projects that it believes are flouting securities law.
Furthermore, amid an impending US government shutdown, the SEC has reportedly delayed multiple spot Bitcoin exchange-traded funds (ETFs). Several big names, including the likes of BlackRock – the world’s biggest fund manager – Invesco, Bitwise and Valkyrie have been affected by this delay.
