The future of American crypto looks bleak as Gary Gensler declares war—and it could mean the end of Coinbase in the U.S.

The crypto industry began the week preparing for a congressional hearing that it hoped would pave a path toward new regulatory framework.

The chairman of the Securities Exchange Commission had other ideas.

On Monday, Gary Gensler dropped a long-awaited lawsuit against Binance, exposing embarrassing details of a campaign by the world's biggest crypto exchange to evade U.S regulation. The following morning, he dropped a second complaint against Coinbase before embarking on a TV tour that would portray the crypto industry as lawless and out of control. He also questioned the need for crypto, telling Bloomberg: “We don’t need more digital currency…we already have digital currency—it’s called the U.S. dollar."

Gensler's gambit was an unusually political action by a regulator—but also a successful one. Even his biggest critics in the industry quietly acknowledged to Fortune that the SEC chair had put them on the defensive, backing Coinbase into a corner during a week when the company had planned to put forward a narrative about working with Congress to create a better regulatory regime.

Gensler may have won the week, but whether he can succeed in his longer-term goal of bringing the crypto industry under his thumb is unclear. Figures in crypto are quick to tell you that Gensler's aggressive enforcement campaign has put him out over his skis, and predict that it's a matter of time until the SEC receives a comeuppance by way of a federal court. Others, however, are less sanguine. According to one legal source, this week's complaint against Coinbase poses an existential threat to the company, and the broader U.S. crypto industry may be living on borrowed time.

'You simply can't ignore the rules'

The substance of the SEC's two crypto complaints are very different. In the case of Binance, the agency alleges the company sought to dupe U.S. regulators and engaged in so-called "wash trading"—trading with oneselt to inflate volume—and that it comingled customer funds with its own accounts. It's also significant that the SEC filed its complaint in Washington, D.C.—a sign, legal experts say, that criminal charges against Binance are also on the way.

In contrast, the SEC sued Coinbase in Manhattan, the customary forum for more run-of-the-mill securities litigation. And indeed, the agency's allegations against Coinbase are more pedestrian. Sources close to Coinbase, however, told Fortune they believe Gensler timed the SEC's complaint to coincide with the Binance one in order to conflate the companies' behavior in the minds of the public and lawmakers.

Meanwhile, the SEC reinforced its efforts to portray Coinbase as a scofflaw on Tuesday, with a senior official declaring, "You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones."

The federal judge who will hear the case is unlikely to allow the SEC's tactical maneuvers to inform any eventual ruling. But this may not matter since the agency's allegations—while not as dramatic as the ones against Binance—are still serious, and, if they stick, will pose a grave threat to Coinbase's business model.

The SEC alleges that Coinbase sold 13 tokens as unregistered securities. Meanwhile, the agency also argues that the company acts as a broker, an exchange, and a clearinghouse—and did not get permission from the agency to do any of these things.

In the traditional financial world, the SEC requires that these activities be carried out by different entities so as to protect consumers. Coinbase and other crypto companies, however, argue that such divisions are unnecessary because of blockchain technology, and that it makes no sense to cram the square peg of their operations into the round hole of financial regulations designed for another era.

The upshot is that if the SEC prevails in its lawsuit, Coinbase would emerge badly hobbled. It could be forced to divest some of its core operations and limited to selling Bitcoin and Ethereum—an activity that has become increasingly low-margin and commoditized. Industry experts say this could mean the regulatory environment becomes unviable for U.S. crypto companies.

"There's a 33% chance Coinbase won't exist in the U.S. in five years," says Preston Byrne, a longtime crypto lawyer and partner at Brown Rudnick.

Byrne predicts that if Coinbase faces setbacks in the SEC case, the firm will accelerate its international expansion strategy. He added that aggressive enforcement actions by the SEC would likely have spelled the death knell for the entire crypto industry a decade ago, but that the U.S. market is now dwarfed by those overseas—a trend he says will continue as countries such as Nigeria, whose population could surpass the U.S. in coming years, embrace crypto.

Byrne's view of the robustness of the global crypto economy is borne out by current crypto prices. While Bitcoin and Ethereum dropped around 6% following news of the SEC's Binance complaint, they've since recovered, with Bitcoin trading over $27,000 as of Wednesday morning.

Gensler's campaign against Coinbase, meanwhile, does not mean there is no place for a U.S.-based crypto industry. The Financial Times reported last week that traditional Wall Street names like Charles Schwab and Fidelity are preparing to move into the sector by offering services like custody—the industry term for storing crypto—and seeking to challenge crypto-native firms.

'The SEC is not the law'

In interviews with Fortune, industry executives were surprisingly upbeat about the chances for Coinbase and other crypto firms to prevail against Gensler—though it's not certain whether that sentiment was expressed sincerely or strategically.

An executive at a prominent venture capital firm, who asked not to be identified, said it had sent out letters to its limited partners reassuring them the SEC's actions did not represent a long-term threat to crypto. She also suggested that lawyers at the firm and at crypto companies—many of whom have experience at top levels of the U.S. government—believe Gensler, who is not an attorney, has overplayed his hand.

"The SEC is not the law," said the executive, saying the agency's enforcement campaign has been based around interpretations of existing securities rules that are rarely applied in the context of federal courts.

While those with a stake in lawsuits typically view their chances in a rosy light, the outcomes of several high-profile cases involving crypto and the SEC are genuinely up in the air. These include the closely watched SEC v. Ripple, which turns on whether the agency correctly designated the XRP token, which launched in 2013, as a security. And in another case involving the trust company Grayscale, Bloomberg Intelligence recently upgraded the firm's chances for success from 40% to 70% following a hearing in which a three-judge panel suggested the SEC had behaved in a high-handed and arbitrary manner in denying an application for a Bitcoin ETF.

A loss for the SEC in one of those cases would likely lead the agency to adopt a less aggressive approach to crypto enforcement, and it could lead it to dropping charges or agreeing to settle with Coinbase. For now, though, the market does not appear bullish on Coinbase's prospects, as shares of Coinbase on Wednesday were down 15% from the start of the week.

A person close to Coinbase leadership, meanwhile, told Fortune the company doesn't believe Gensler wants to drive crypto from American shores, and that crypto is simply going through a period of regulatory uncertainty similar to other upstart industries before it.

"Like Uber or Airbnb, this a natural process for any regulated utility," said the Coinbase source.

This a common sentiment across the industry—one that implies the crypto industry will catch a break, either in the courts or in Congress, to escape Gensler's grasp. But the industry also acknowledges that, for now, the worst is likely yet to come.

Other shoes to drop

The SEC's lawsuits against Binance and Coinbase this week garnered attention because the two companies are the biggest names in the industry, but the agency is actively pursuing numerous other cases against crypto firms. And in interviews with Fortune, crypto insiders predicted more cases are on the way—including legal actions from the Justice Department, which has the power to bring criminal charges. Several people said they expect the DOJ to announce such charges against Binance imminently.

If multiple federal agencies are pursuing a company, the charges brought typically drop in tandem, but that has not been the case with Binance. Roughly two months before the SEC's complaint, the smaller Commodities and Futures Trading Commission sued the company in federal court, which has raised questions about the staggered nature of the charges.

One industry source told Fortune that the agencies are indeed coordinating, and that the delay in the Justice Department bringing charges against Binance is likely because the agency is in ongoing settlement talks with the company or because it needs more time given the complexity of the case. Several people speculated that Binance will also face charges from the Office of Foreign Assets Control, a Treasury Department agency tasked with overseeing sanctions violations.

Two crypto industry figures in Washington, D.C., however, suggested that a rivalry between the SEC and other agencies has undermined customary cooperation, and that Gensler's personal ambitions and taste for swashbuckling politics has made him unpopular.

"He's pissed off people at the Fed, Treasury, and the Justice Department," said a former Capitol Hill staffer and veteran crypto lobbyist.

Meanwhile, many in Washington are suspicious of Gensler's motives. Critics suspect his recent hardline stance against the crypto industry is intended to make Democrats forget that he failed to spot massive frauds at the stablecoin project Terra and at FTX, and about his personal and professional connections to FTX's disgraced founder, Sam Bankman-Fried.

This view was shared by the VC executive, who said political winds could shift against Gensler in the coming months, providing an opening for legislation that would remove the SEC from oversight of certain elements of the crypto industry.

The likelihood of this transpiring is unclear and may reflect wishful thinking on the part of the crypto industry. As for Gensler, who has declined repeated requests to speak with Fortune, he's proved adaptable and morally fluid in the eyes of his critics—who point to a career arc that has seen him evolve from a Goldman Sachs banker to CFO for Hillary Clinton's presidential campaign to his current role as a close ally of Sen. Elizabeth Warren (D-Mass.) and other progressives who abhor crypto.

Whatever Gensler's motivations, he appears to have the upper hand on the crypto industry for the moment. While Coinbase and other crypto companies will likely survive his reign one way or another, they may have to find their way forward far from U.S. jurisdiction.

This story was originally featured on Fortune.com

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