Here's what the SEC's 'all-out assault' on crypto means for the market's 2 biggest players

• The SEC's lawsuits against Coinbase and Binance are a big deal.
• It's alleging that the exchanges are operating illegally and have broken securities rules.

It's a watershed week for the cryptocurrency industry, but not in the way that the market has been used to over the last decade of unfettered growth and bold claims of creating the future of money.

The Securities and Exchange Commission unveiled its lawsuit against Binance and CEO Changpeng Zhao on Monday. On Tuesday, it followed up with a suit against Coinbase, the largest cryptocurrency exchange in the US and a publicly traded company.

Back in March, there were rumblings that a wider crackdown was getting underway as the SEC and the Commodities Futures Trading Commission took action against a handful of market players, including Binance's Zhao — mere shots across the bow compared to this week's moves though.

An 'existential' matter

In both cases, the SEC says the exchanges are operating illegally, offering unregistered securities to their users, and have failed to properly register as brokers. The suit against Binance goes quite a bit further, alleging misuse of customer funds, and that money has been funneled to affiliates controlled by Changpeng Zhao to engage in wash trades that artificially boost Binance's volumes.

While experts largely agree that the Binance case is more serious, they also see the lawsuits as a real threat to how both businesses operate in the US. While Binance could potentially retrench and move away from doing business in the country — it's registered in the Cayman Islands, but has no officially listed headquarters — that wouldn't be tenable for Coinbase, as US revenue accounted for $687 million of the total $773 million it took in during the first quarter of this year.

"If this goes poorly, it could be an existential issue for Coinbase," Jeff Blockinger, chief counsel at decentralized finance platform Vertex Protocol, told Insider. He added that it wouldn't be a matter of simply relocating, as most of its revenue and customers are in the US, and therefore within the purview of the SEC.

"The regulatory infrastructure, if you assume this is successful for the SEC, it's not going to matter where their headquarters are," he continued.

For his part, Coinbase CEO Brian Armstrong says he's "proud to represent the industry in court to finally get some clarity around crypto rules," and pointed out in a Twitter post that it was the SEC that reviewed its business and allowed it to go public.

Sources told Insider they expect Coinbase to fight extremely hard against the suit, which essentially says its whole US operation is illegal. As for Binance, Gensler himself this week drew the line between the exchange and FTX, saying there are similarities in both cases.

"There's parallels here to the FTX fraud manipulation that we saw and [what is alleged] against Sam Bankman-Fried, where he had a sister organization, Alameda, and the special arrangements with that trading platform FTX," Gensler said in an interview with Bloomberg TV on Tuesday.

In a stark warning to the industry, Gensler not only told investors on Binance to "beware" of holding their money on the platform amid "such a web of deception," but also said that registered investment advisors holding client assets on the exchange are probably out of compliance.

"This is an all-out assault, particularly in regards to Binance, but it is a broader assault on the industry. This is the SEC stepping in and saying they're the sheriff and they're exercising their authority," Richard Smith, chairman and executive director of The Foundation for the Study of Cycles, told Insider. "I think this is existential for Binance in the US."

Ron Geffner, partner at Sadis & Goldberg and a former official in the SEC's division of enforcement, said that the cases could also be resolved more quickly than people think, and they probably won't get bogged down in legal wrangling like the SEC's case against Ripple, which has dragged for several years.

"If the SEC thinks customer assets are at risk, the good news here is that it could lend itself to a more timely conclusion."

Geffner agreed that the cases are a big deal, but expressed hope that it might not be such a cataclysmic event for Coinbase.

"There's real teeth here, but if I am a regulator and I see that Coinbase has started to tighten the ship, while it might show some culpability, it also shows an indication they're trying to abide by the law. So maybe that's means just a penalty rather than them saying, 'we're shutting you down.'"

A deal just means 'the casino can stay open'

From Smith's point of view, the real existential matter isn't the SEC's lawsuit but rather the nature of the market itself.

"I have to say that I am disappointed at this point in crypto," he said. "The existential issue isn't the SEC, it is whether or not there is any real value in these assets other than gambling or operating an exchange."

There's also a firm belief amongst experts that the SEC's case could result in a huge percentage of the so-called altcoin market going away, or at least leaving the US, if it is found that most crypto tokens are securities.

"That probably wouldn't be a bad thing," Smith said. "I haven't seen the token aspect really creating any value. It's all just trading and flow, and Wall Street taking over and doing way they know how to do which is set up exchanges and create middlemen. That's the existential issue."

"If the SEC and Coinbase cut some sort of deal, that just means the casino can stay open."