SEC’s Gary Gensler Had Crypto in His Sights for Years. Now He’s Suing Binance and Coinbase.

In two years running the Securities and Exchange Commission, he said, he or his staff met dozens of times with cryptocurrency exchanges that were seeking special exemptions from the laws governing the rest of Wall Street. Those talks didn’t lead anywhere, and neither did Gensler’s efforts to cajole, prod and even threaten crypto into compliance.

Now the SEC is unleashing a barrage of enforcement actions against crypto’s biggest middlemen, in a fight that has existential stakes for the companies and could define Gensler’s legacy.

“I’ve been around finance for four decades," Gensler said in an interview Tuesday. “I’ve never seen so much just noncompliance and hype masquerading as reality as I’ve seen in this field."

The SEC this week sued Binance, the world’s largest crypto platform, and Coinbase, the biggest U.S. platform. It said they operated as securities exchanges without properly registering their business with the SEC. The agency hopes courts will order the firms to follow its rules for stock exchanges or stop trading crypto assets in the U.S.

The lawsuits, which the companies say are misguided, could take years to resolve. If the SEC lost either case, it would be a setback for the government’s ability to oversee the crypto market.

The enforcement actions mark the culmination of a strategic pivot by the SEC under Gensler. Before he took the agency’s helm, the SEC repeatedly sued individual cryptocurrencies—a potentially endless game of whack-a-mole in a market with thousands of assets. When Gensler took office in 2021, he urged enforcement staff to target the hubs that most investors use to buy and sell crypto.

Gensler says most crypto tokens have the hallmarks of securities: People buy them hoping to make a profit from the efforts of their creators and promoters. That means investors should get the same disclosures that public companies provide when they sell stock, Gensler says. Crypto-trading platforms should behave more like the New York Stock Exchange, he adds, and shed conflicts of interest and risky practices that haven’t been allowed on Wall Street since the 1930s.

Crypto exchanges say the SEC’s rules don’t make sense for their business models and that the tokens on their platforms aren’t securities. But calls to rein them in have increased since exchange FTX failed in November amid fraud claims.

Before the SEC sued Coinbase, company representatives had more than 40 meetings with SEC officials dating to January 2018, according to legal records the company made available in April. In some meetings, the company shared why it thought it could safely list certain tokens, or explained how other products worked.

In late January, Coinbase said, the meetings abruptly stopped after the SEC enforcement division said a lawsuit would be forthcoming. The company asked for a meeting with Gensler. An aide to the chair didn’t reply.

“Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America," Coinbase Chief Executive Brian Armstrong said on Twitter after the lawsuit was filed. “If we need to avail ourselves of the courts to get clarity, so be it."

In the interview, Gensler criticized the industry’s arguments against regulation.

“They don’t really want to do the hard work to come into compliance—that’s what we’ve largely found," said Gensler, 65 years old, a former Goldman Sachs partner. “They have to change their business model, and they might have to disclose things that they don’t find comfortable disclosing."

Gensler’s tough stance on crypto reflects his hard-charging instincts, people who know him say. As the Commodity Futures Trading Commission chairman from 2009 to 2014, he was known for moving fast and making enemies. In a few years, he revamped regulation of the global swaps market, overcoming lawsuits from Wall Street firms in the process.

After the CFTC, Gensler assisted Hillary Clinton’s unsuccessful 2016 presidential bid, then taught a course on crypto and finance at the Massachusetts Institute of Technology. He was always fond of the university; as teenagers, Gensler said, he and his twin brother were involved in a study of “mathematically precocious youth."

At MIT, Gensler sometimes praised bitcoin’s underlying technology, known as blockchain, and said cryptocurrencies could make payments cheaper. But he also expressed the same views that drive his strategy at the SEC: Most tokens are securities, and the trading platforms’ business models—combining exchange, broker and clearinghouse functions—involved inherent conflicts.

“We probably want these exchanges regulated," he told a class of MIT students in 2018. He predicted—incorrectly—that the SEC would crack down on the trading platforms within a year or two.

Gensler’s close study of crypto earned the support of Sen. Cynthia Lummis (R., Wyo.), one of just three Republicans to back him in a tight confirmation vote to become SEC chair in 2021. Lummis’s state has tried to become a regulatory haven for crypto firms.

But pressure has been building from other corners for Gensler to crack down on crypto’s biggest players. A string of bankruptcies by crypto firms last year vaporized nearly $2 trillion of market value. The SEC was investigating FTX before its collapse last year.

“This is long overdue," Rep. Brad Sherman (D., Calif.), a critic of the crypto industry, said of Gensler’s latest enforcement push. “There shouldn’t be any negotiation as to whether these exchanges follow the law."

The SEC’s action comes at a critical time for crypto. Coinbase has posted five consecutive quarters of losses, the market has lost nearly two-thirds of its value since November 2021, and FTX’s demise hurt the industry’s credibility in Washington.

Trying to harness the industry through litigation is a long-term approach, though. Crypto entities have built war chests they now say they will spend fighting the SEC. Binance earned at least $11.6 billion from 2018 to 2021, according to the SEC’s lawsuit.

The commission has already spent three years trying to prove that just one major cryptocurrency, XRP, is a security. XRP was the world’s third-largest digital coin when the SEC sued its issuer, Ripple Labs, in December 2020.

Ripple says it expects to spend more than $200 million fighting the SEC’s claims. A judge could rule on Ripple’s case, deciding whether XRP is a security or not, as soon as this summer. Ripple says it will appeal if it loses.

When Gensler took over the SEC in 2021, the agency had brought dozens of enforcement actions against crypto firms and developers, but many of the targets were fairly minor. It had settled one case related to an exchange, which netted a $375,000 fine. Meanwhile, crypto firms found new ways to issue digital assets and list them on exchanges.

At the SEC, Gensler has taken a negative tone about the industry. He also doubled the size of the enforcement division’s special crypto unit, authorizing more trial lawyers to support a surge in litigation.

Gensler prodded the lawyers to look closer at exchanges and other middlemen. “That was a pivot," he said this week.

He continued to meet with crypto advocates but often disappointed them. Six months into his tenure, he spoke by video with senior executives of Andreessen Horowitz, the top venture-capital firm investing in cryptocurrencies. He took a tough tone from the start, saying he thought almost all cryptocurrencies were securities and couldn’t be persuaded otherwise, according to people familiar with the matter.

After FTX’s fall, Gensler said on CNBC that crypto exchanges were running out of time to comply. At a conference in December, Gensler’s crypto enforcement chief, David Hirsch, said: “Enforcement is ready to stand up."

Gensler’s aggressive approach at the SEC has created tension with the Commodity Futures Trading Commission, the agency he once led. He has given indications that he views the second-largest cryptocurrency, ether, as a security. The CFTC had already allowed exchanges it regulates to list futures on ether, saying it was a commodity like bitcoin.

Some CFTC officials were irked in July 2022 when the SEC filed an insider-trading case against a former manager at Coinbase, according to people familiar with the matter. CFTC officials thought some of the tokens named in the SEC’s lawsuit weren’t securities, the people said.

Two months ago, the CFTC filed its own enforcement lawsuit against Binance. The claims were similar to the SEC’s, though they focused on the sale of crypto derivatives.

If the SEC ultimately wins in court, it could restrict how Americans buy and sell digital assets beyond bitcoin and a limited number of others that courts say are commodities. So-called decentralized platforms are growing, but they aren’t as easy to use as the exchanges.

“If you’re just a retail user, if the big exchanges shut down, I don’t know what you do," said Stephen Palley, a lawyer who co-chairs the crypto practice at Brown Rudnick.

On the other hand, a major court loss could call into question the SEC’s theory for regulating crypto—and deal a blow to Gensler’s legacy.

Gensler said the SEC would consider appealing any losses. But the SEC has forced many crypto firms to settle and hasn’t lost any trials to date against crypto defendants, he said.

“If you’re winning all your cases," Gensler said, “you’re not bringing enough cases."