Coinbase, Binance sued by SEC: Where does regulation go from here?

As the SEC puts pressure on crypto exchanges Coinbase and Binance, digital asset holders are beginning to question the timeline for clear crypto regulation. Delta Blockchain Fund General Partner Kavita Gupta joins Yahoo Finance Live to discuss the outlook for proper crypto regulation and the ongoing debate's impact on crypto markets.

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AKIKO FUJITA: Well, Coinbase and Binance may be the latest targets of Securities and Exchange Commission Commission Chair Gary Gensler, but the regulatory backdrop for the crypto industry remains murky. So the lawsuits this week raise questions whether we could see regulation start to take shape sooner rather than later.

Let's bring in Kavita Gupta, Delta Blockchain fund general partner. Kavita, it's good to talk to you today. As we noted earlier, 14th case that the SEC has brought against crypto entities since January. You've highlighted the fact that this development today is not necessarily a surprise, but it is surprising that they've suddenly identified a group of tokens as securities. I mean, what did that tell you about what the approach is going to be moving forward?

KAVITA GUPTA: Honestly, it actually raises question on the approach, right? Because suddenly you have some 13 tokens and one complaint and 12 tokens and one complaint without any explanation by only these 12 or 13 [INAUDIBLE] security. But are they based on decentralization? Are they based on the usage case of it or lack of centralized-- decentralization? I think the first question that I was reading the complaint yesterday and today, it's like, why these?

And of course, everybody talked about Ethereum was the one which everybody was expecting on this. It wasn't there. But I think the questions out there is, what are the basis of picking up these tokens? What are the basis, which is going to justify going forward? What are actually securities and not securities? And do SEC actually creates a pathway and say, this is how it should work? Or they just say going back, hey, we didn't give you any clarity, but let us sue you. So it's been very interesting conversations around that.

SEANA SMITH: Kavita, do you think that this is actually going to drive Congress to eventually take action? TD Cowan was out with a note today saying that this action from the SEC, it's going to drive a review of the SEC stance. And we could essentially, then, maybe see something finally happen down in DC. Do you agree with that?

KAVITA GUPTA: I think everybody is eyeing the election year. And I do feel like it has become a very politicized topic between Democrats and Republicans because the approaches are very different. Sometime back, Hester Peirce had a document saying that we should have a pathway of what does take a particular token towards saying it's a utility based on how much decentralization over one year or two years has to happen. And we need to give them a pathway to grow.

And that suddenly reappears after a long time in the Republican proposed legislation, which is way more pro crypto than Democrats. Going back to Seana, exactly what you asked, I feel like it's just getting a lot of headlines, but where does it really go from there? Because from last two years, we just keep on hearing headlines after headlines from SEC.

And after the headlines, nothing really moves in any direction. Even the lawsuit, which Coinbase did on SEC, apart from the headline, there has not been any progress. If [INAUDIBLE] fall down, not any progress. So even if you're talking about DC and the government moving in this direction to make a very decisive movement, how much time do we have for them to really do it?

AKIKO FUJITA: Kavita, the lawsuits that we got this week against Coinbase, but as well as Binance, does that complicate the path for Congress in trying to create this regulation? Because the debate, for a long time has, been who actually has the authority to regulate. The SEC, in pushing forward with these losses, they're saying, here's the guardrails that we're sending forward.

KAVITA GUPTA: Yeah, absolutely on point, Akiko. Like, there has been a lot of questions about, who has the authority? Is it just SEC comes and say this is security, so now we're going to go on it? It's just like a big field. And CFTC can come and say, oh, we are not sure about it, maybe because of strong leadership or not. And then SEC can come, having a strong leadership or very vocal leadership to be at that, and say, OK, this is just our jurisdiction. And where does the utility go?

I think there has been a lot of confusion between whether it's commodity versus security, if it's security, how should it go? I think what we're going to see are just a lot of questions, again, back in the market, but what I've learned in last two years, never answer either from the government or from SEC. Hopefully, that changes this time.

SEANA SMITH: Kavita, what do you think this is going to do to startups, just in terms of crypto innovation here in the US? Are we going to see more of those smaller companies look elsewhere to build their business?

KAVITA GUPTA: Unfortunately, last year and a half, already most of the amazing startups have been incorporating outside US, even if they are US citizens. And we have been seeing the innovation, and I'm not even talking about tokens or crypto, but really good blockchain innovation being pushed out to places like Lisbon and Dubai and Singapore. And this is just going to make it even much more stronger. So that's an unfortunate fact about this all hype and no substance or no clarity on, "Hey, this is the law. Abide by it, and we are all good." Like, there is nothing like that.

AKIKO FUJITA: I mean, what does that ultimately mean for those investors, those who are holding some of these coins? Because if there's anything we've learned from what happened, for example, with FTX, it was that the fact that so many of these exchanges were operating internationally where the regulatory guidelines were not there, that's what put those users at risk.

KAVITA GUPTA: So I think there are two points, which I would love to cover on this. It's a very good question. The first part is that if you-- Coinbase did go to IPO in the US and disclosed everything. Most of the tokens, which has been listed at security by SEC today, were already listed on Coinbase when they went to IPO. So what really happened, didn't SEC really signed off at that point of time? So how suddenly you are actually-- your job is to protect retail customers. And so you have allowed this to have an offering within US, in fact, have an IPO, and now you're going back and suing and saying, no, you couldn't offer it?

So I'm very confused. I'm not a lawyer, but I'm very confused on this. On the investor side, if I say, there was a big crash when FTX happened or Luna happened or 3AC happened. If you see with these lawsuits the last two days, the maximum down part, which happened in all coins yesterday, over 10%, in fact, Bitcoin, and it went up 2% something today. So the strength hasn't gone in the market. Nobody who are deep crypto natives or investors are actually taking it seriously because most of the traditional investors knows these are just like news headlines.

What really is going to happen here, that pathway is going to take four to five years. Are you just going to make crypto disappear for four to five years till everybody is figuring it out? That's almost impossible to have, right?

SEANA SMITH: Kavita, is that why we're not seeing more of a reaction in Bitcoin today? I mean, take a look at the price of Bitcoin, up just about 4%. Yet, you're seeing more of a crackdown here on these exchanges.

KAVITA GUPTA: So Coinbase, the Coinbase token, like, the security did go down in a significant way because, of course, that's like the one bad news. But I also feel if they're going to report a really good earnings report, like in the past, they actually still going to do really good. Because at the end of the day, what we have seen in last two years, no action and just talk and headlines. So until and unless there is actually going to be a real action and a pathway to figure out something, whether it's an extreme ban or whether it is, let's figure it out, it's a long process.

People who already hold the bag, are they not going to hold it and suddenly going to crash it? There is no reason to do that because the Bitcoin, ETH, and the other altcoin, the businesses built on Polygon, businesses built on Ethereum are still flourishing. There is daily new announcement being products coming out on Bitcoin-based, like a recent Sam Altman product which came out raising $90 million. So I feel like the technology utility is so high that developer adoption is so high, that right now, we're just talking about regulations, which are going to take a decade, and just going to walk around it.

AKIKO FUJITA: Yeah, it feels like that conversation has continued. Kavita Gupta, Delta Blockchain Fund general partner, it's good to have you on today. Really appreciate the time.

KAVITA GUPTA: Thank you.