Crypto firms are playing poker with the SEC as agency cracks down on the industry

Cryptocurrency firms are playing poker with the Securities and Exchange Commission, boldly threatening to depart the US because the regulator increases pressure on the industry to comply.

The major players are hoping the SEC and Washington will take what crypto watchers see as bluffs seriously and soften the hard line regulators have taken on the industry.

Executives from firms including cryptocurrency exchange Coinbase and blockchain services firm Ripple are piling up with comments geared toward the SEC and signaling plans to maneuver operations overseas to rally support and send a message to US politicians concerned the country might miss out on a key technological innovation.

Coinbase CEO Brian Armstrong said last week that the SEC is waging a “lone crusade” with its hard-line actions against some crypto firms. He added that Chairman Gary Gensler had adopted an “anti-crypto view” despite having previously been a supporter of the industry during his time as an economics professor on the MIT Sloan School of Management.

“The SEC is a little bit of an outlier here,” Armstrong told CNBC’s Dan Murphy in an interview in Dubai. “I do not think so [Gensler is] necessarily trying to manage the industry as much as it could actually restrict it. But he’s created some lawsuits, and I believe that is pretty useless to the industry within the US.

Ripple CEO Brad Garlinghouse also broke into the SEC this week. When asked about Gensler’s message as the corporate announced its Dubai expansion, he quipped: “Who?” before later saying that Ripple would spend $200 million to defend against the lawsuit launched by the regulator until it’s accomplished.

“I find that as an organization that began within the United States, and as someone who’s a US citizen, this is gloomy. I’m sad about that. The US is overtaken not only just a little, but so much,” Garlinghouse said.

“The difficult thing is that you will have a rustic that I believe has put politics above politics and that is not a superb decision in case you’re trying to take a position within the economy.”

Dubai and Europe have proven to be rather more favorable markets due to their virtual asset regulatory framework, Garlinghouse said, adding: “The US is unquestionably stuck.”

Garlinghouse, Armstrong and other crypto bosses have threatened to depart the US, highlighting industry concerns that the SEC’s crackdown is getting too harsh. The regulator has taken strong enforcement motion against firms including Ripple, Coinbase, Kraken and Paxos, accusing each of them of violating securities laws.

The SEC says most tokens out there could qualify as securities, which might subject them to much stricter registration and disclosure requirements. Cryptocurrency firms, in fact, have refused to treat the assets they issue or trade on their platforms as securities.

The query is, could they really have left? It looks quite unbelievable.

“The US is one in all the largest crypto markets and due to this fact most unlikely to go away,” Larisa Yarovaya, an associate professor of finance on the University of Southampton, told CNBC.

“The biggest fear of crypto firms is that regulation will cause panic amongst cryptocurrency investors and costs will fall. Appearing confident (even conceited) is a typical tactic of CEOs of crypto firms. They think that this can translate into investor confidence, overconfidence in some cases and encourage investors to further irrational behavior, e.g. HODL [hold on for dear life] even when markets fall.

Ripple’s Garlinghouse has threatened to maneuver its company’s headquarters abroad from 2020. In October this 12 months, he said that the UK, Switzerland, Singapore, Japan and the UAE are being considered for potentially moving Ripple overseas.

It hasn’t happened yet.

Meanwhile, the top of Coinbase hinted at an April fintech conference in London that the corporate would consider options for more investments abroad, including relocating from the US to other countries, if the exchange doesn’t get US regulatory clarity

A month later, Armstrong said Coinbase “has no intention of moving overseas.”

“We’ll at all times be within the US… But the US is a bit behind straight away,” he told CNBC.

According to a survey conducted by Morning Consult for Coinbase, the US is a big marketplace for the industry, with over 50 million Americans claiming to own some cryptocurrency.

“These firms place rather more emphasis on international markets. But personally, I am unable to imagine the highest of the market leaving the US market entirely,” Jonathan Levin, co-founder of Chainalysis, told CNBC in an interview in London.

“It’s more about how much you are investing in recent international expansion where perhaps it wasn’t that top on the priority list but now let us take a look at France, let us take a look at the UK.”

Moreover, it could be difficult to practically relocate these already large firms from the US.

“While these industries are inherently virtual, they still need people, and folks have families, mortgages, and preferences about where they live. It’s easier said than done to interchange them with local talent in a recent location,” George Weston, a partner at global law firm Harneys, told CNBC via email.

Cryptocurrency bosses are capitalizing on concerns from some officials that the US is shrouded in regulatory uncertainty, while other jurisdictions equivalent to the European Union and the UK have moved ahead with proposed digital asset regulatory frameworks.

SEC commissioner Hester Peirce told the Financial Times conference last week that the US is “shooting itself within the foot by not having a regulatory system within the US.”

She praised the EU for progress in passing regulations for the crypto industry.

The EU is predicted to introduce the primary comprehensive set of digital asset rules, often known as crypto asset markets (MiCAs), sometime in 2024.

“It’s really commendable that Europe has been capable of do that so quickly,” Peirce said, in line with Reuters. “If we built a superb regulatory system, people would come. I believe you will see that with MiCA.”

Diego Ballo Ossio, a partner at law firm Clifford Chance, said other jurisdictions, including the UK and EU, are changing their legal frameworks to create clear regulatory regimes for exchanges.

“It signifies that other countries are effectively giving US-based exchanges an option – a spot to maneuver to. It’s not inconceivable that a U.S. exchange has decided to create operating centers in jurisdictions aside from the U.S. where it’s protected to innovate and improve the product,” he told CNBC.

Binance, the world’s largest crypto exchange, recently reported that it’s finding it harder for the corporate to do business within the US and that it intends to establish a regulated business within the UK

Patrick Hillman, the corporate’s chief strategy officer, said the US “has been very confusing over the past six months,” pointing to the SEC’s actions against Coinbase as an indication of how the country is in a “strange place.”

While the US crypto industry could also be making empty threats straight away, there may very well be an actual problem if regulators in America fail to maneuver forward with thoughtful regulation.

“My conclusion is that I believe it’s more saber-rattling than a real desire to stand up and leave the US, but when the SEC continues on the trail it’s on, many firms can have no alternative but to try a special way of doing business. It’s existential,” Daniel Csefalvay, a partner at law firm BCLP, told CNBC by email.