For a long time, the crypto industry has been a Wild West with few regulations and laws governing it — a fact that many crypto enthusiasts saw as a feature, not a bug.

Unlike registered securities — as in, stocks — cryptocurrencies and crypto exchanges didn’t have to disclose much of anything to customers, and the list of lies and frauds rocking the industry has continued to pile up. That freewheeling era now appears to be coming to an end.

This week, the US Securities and Exchange Commission (SEC), a federal agency that regulates securities and protects investors, filed lawsuits against Binance and Coinbase, two of the world’s biggest crypto exchanges, on which investors buy and trade a large offering of cryptocurrencies. The SEC’s main allegation against Coinbase is that it’s running an unregistered securities exchange — like if the Nasdaq independently operated without any regulatory oversight. Binance faces the same charge, as well as additional accusations that it appropriated billions of dollars in customers’ funds for its CEO’s trading firm, misled its customers, lied to regulators, and more. Binance has about 90 million users, according to CoinMarketCap, while Coinbase reported that it had 110 million verified users as of 2022.

That the agency is going after such behemoths — after bringing cases against the most egregious bad actors, such as Sam Bankman-Fried, as well as celebrity crypto endorsers like Kim Kardashian (who paid a $1.26 million fine), Lindsay Lohan, and Jake Paul — sends a clear message. It’s no longer calling out a few rotten apples; it’s saying the whole enterprise needs to be scrutinized under a regulatory lens. (Disclosure: This August, Bankman-Fried’s philanthropic family foundation, Building a Stronger Future, awarded Vox’s Future Perfect a grant for a 2023 reporting project. That project is now on pause.)

At their core, the SEC’s lawsuits against the two companies are the most decisive actions to date in the prolonged battle to settle what cryptocurrencies and crypto exchanges even are. Are they being used as digital money, or is crypto — whether it’s ethereum, tether, or cardano — like a share of a company where investors are speculating on making a profit as “share” prices go up?

The latest legal action represents an existential threat to the entire industry. So, whether you have $20 or $200,000 in assets on a crypto exchange, should you be worried?

“It’s a very scary situation for any customer,” says John Reed Stark, a former SEC enforcement attorney. “I think anyone who has crypto on any exchange should take it off of that exchange immediately. Period, end of story.”

In a lengthy statement, Binance denied the SEC’s allegations and claimed that its litigation would “undermine America’s role as a global hub for financial innovation and leadership.” Coinbase CEO Brian Armstrong tweeted similarly that the approach of regulating crypto through enforcement was “harming America.” In a statement to Vox’s Sara Morrison, Coinbase’s chief legal officer and general counsel Paul Grewal bemoaned what he called the SEC’s “enforcement-only approach” and called for clarity in the agency’s rules.

In Stark’s view, chances are good that the SEC will prevail. “The SEC has brought close to 150 cases in the area of crypto,” says Stark. While many of those cases are still pending, the SEC’s track record so far has been extremely strong. If the latest lawsuits stand in court, the exchanges will have to become compliant under the SEC’s regulatory rules — and if not, they could shut down in the US. It’s possible that Binance and Coinbase (and other exchanges) could cease operations, but that doesn’t necessarily mean customers would be unable to get their money out.

There would likely be an orderly wind-down of operations, according to crypto researcher and critic Molly White, who writes about the scandals and scams within the cryptocurrency industry on her site Web3 Is Going Just Great.

Below, we’ve provided the answers to a few more questions you might have about the current crypto turmoil, including what it means for you.

What is the SEC upset about?

There are clear reasons for individual crypto investors to be concerned: The SEC has asked for an emergency order from the court to freeze Binance US’s assets. According to Stark, this move suggests that the SEC has strong evidence of wrongdoing and believes it will win its case. It also shows that the agency believes investor funds might be at risk. There’s a precedent for this fear: As you may remember, another crypto exchange, FTX, found it difficult to return customers’ money because, as bankruptcy proceedings have revealed, the firm’s financial records are such a jumbled mess that it’s hard to account for what’s missing and what has possibly been stolen.

The SEC’s take on crypto exchanges is clear: They are flouting the law as unregistered stock exchanges. Even Binance executives knew it, the SEC’s complaint argues: Binance’s former chief compliance officer admitted once that the company was “operating as a fking unlicensed securities exchange in the USA bro.”

The complaint against US-based Coinbase, which came a day after the lawsuit against Binance, alleges that it’s an unregistered securities exchange that’s putting customers at risk without proper SEC-required disclosures and protections — a charge that would apply to any crypto exchange. The case against Binance, which operates internationally but has a separate US arm, goes deeper, laying out alleged deceptions. The 13 charges filed against the exchange and its CEO, Changpeng Zhao, include allegations that it misused and commingled its customers’ funds — accusations not dissimilar to those made against FTX and its former CEO, Sam Bankman-Fried (who is also facing criminal charges).

The agency is also accusing a separate trading firm owned by Zhao of artificially inflating the volume of crypto being traded on Binance US, an illegal market manipulation tactic called wash trading. SEC chair Gary Gensler said in a press release that Zhao and his company had “engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.” The SEC’s charges against Binance follow a Commodities Futures Trading Commission lawsuit filed earlier this year.

Kevin Dietsch/Getty Images

Why is the crackdown happening now?

Crypto exchanges have been around for a while. So, why now? “It’s kind of a strategic time for the SEC to take these actions, with the recent-ish downfall of FTX, and Celsius and Voyager — these very high-profile collapses,” says White. Coinbase received a notice from the SEC in March that all but declared the agency’s intention to sue.

A lot of the crypto hype also has died down, particularly after the high-octane explosion of FTX last fall, which helped cement public wariness around the lack of transparency and risk management on exchanges. The SEC also recently received firm backing from the Biden administration, which has signaled its intention to work with agencies on regulating crypto.

“I also think that the SEC are getting to a stage where they really need to take some major action that would support the things that they’ve been saying more broadly about the crypto industry,” White continued. Gensler has been making clear that he believes that most cryptocurrencies are securities since his appointment in 2021. In addition to its high-profile lawsuits, the SEC has been beefing up its crypto enforcement unit and its budget; in fiscal year 2021, the agency requested a $1.9 billion budget from Congress. For fiscal year 2024, it’s asking for $2.4 billion.

What does this mean for people who have money in these exchanges?

As Bloomberg columnist Matt Levine quipped in Tuesday’s column, “If you are trading crypto, you simply cannot be too squeamish about strict adherence to US securities law.”

Given the SEC’s signaled intent to aggressively get crypto in line and under its authority, it’s reasonable that investors with a great deal of money in crypto exchanges are spooked. The agency’s complaints call out more than a dozen specific cryptocurrencies that it claims are being sold and offered as securities on Binance and Coinbase, including a popular token called Solana.

Some anxiety is apparent: The share price of Coinbase, a publicly traded company listed on the Nasdaq, initially fell by almost 20 percent according to Yahoo Finance, though it has since rallied. On June 6, the day after the SEC announced its lawsuit against Binance and the day it announced its separate lawsuit against Coinbase, more than $700 million was withdrawn from Binance and about $600 million was withdrawn from Coinbase, according to cryptocurrency news site CoinDesk, which broke the story that culminated in FTX’s downfall.

The situation right now doesn’t yet compare to the panic last winter, when investors withdrew as much as $3 billion from Binance over a 24-hour period in the aftermath of Bankman-Fried’s arrest. (Binance CEO Zhao was the catalyst for a massive withdrawal of funds from Bankman-Fried’s exchange, FTX, eventually leading to the exchange’s implosion and bankruptcy.)

Stark says the comparatively muted response among investors is both surprising and not. When it comes to any kind of investing, the sound financial advice is to be careful of risk and do your due diligence. Yet “due diligence” is almost impossible with crypto, precisely because it’s unregulated. At the same time, crypto enthusiasts tend to be a group that distrusts government regulation; a common narrative among the crypto crowd is that decentralized, alternative digital currencies are actually safer than the US dollar because power and authority aren’t concentrated in just a few institutions.

White says that whether someone should take their money out depends on whether they believe there’s going to be a bank run that collapses the entire exchange, a la FTX. But FTX collapsed because it didn’t have enough cash on hand for the billions in withdrawals that investors suddenly were trying to make — it was in significant debt, didn’t have enough money in reserves, and Bankman-Fried allegedly had been freely using customers’ funds at his personal trading firm.

Binance, for its part, has said that all of its assets are fully backed; during last December’s onslaught, in which $1.9 billion in funds were withdrawn, a company spokesperson said that it had “more than enough funds” to process withdrawals. As a public company, Coinbase reports audited quarterly financial statements showing how much money they have in reserves. “I feel like if there was a major risk of a quote-unquote bank run happening, we sort of would have seen it by now,” White says.

White notes that there’s always a risk with unregulated crypto exchanges that aren’t required to disclose much of anything and aren’t required to have risk management controls in place. That is, after all, the thrust of why the SEC is going after them.

“I think a lot of people within and outside of the cryptocurrency industry will argue that keeping cryptocurrency assets on exchanges is not necessarily the best idea to begin with,” White says. The general advice is to keep your crypto in an offline storage device that you have direct access to. But for avid crypto traders, the point is to buy and sell quickly — to trade, not just leave crypto in an offline “wallet.” And the risk and lack of transparency in crypto exchanges is probably no surprise to them, either. “I think that anyone who is shocked by [what Binance is being accused of] probably hasn’t been paying that much attention,” White says.

But plenty of lay investors have money in Coinbase and other exchanges, too, and the reality is that Coinbase and every other crypto exchange all lack investor protections — there are no audits or inspections from the SEC, no insurance, and no licensure requirements of people involved in crypto, says Stark.

What’s going to happen to cryptocurrency now?

The outcome of the SEC’s complaints could take years to litigate, according to Ciamac Moallemi, a business professor at Columbia University. “I think one data point is to look at the accusations against Ripple,” he says. The SEC filed a complaint accusing the digital payment network of selling unregistered securities back in December 2020. That case is still pending.

“Assuming that these complaints stand up in court, I don’t think that there’s a scenario in which Coinbase or Binance — particularly Binance — become compliant,” White says. “The business model of cryptocurrency in general and cryptocurrency platforms really relies on not abiding by the regulations that are in place.” Their business model is “regulatory arbitrage”: using loopholes or structuring their companies in countries with friendly crypto regulations. FTX, for example, was headquartered in the Bahamas. One possible scenario here is that the lawsuits could culminate in Binance ceasing operations in the US, and Coinbase shutting down entirely.

Perhaps what should worry crypto traders most of all is just how much of the crypto and Web3 hype has died down, a potential sign that the boom days are over. The crypto whales have made their billions and are off to the next big thing, while the average crypto trader is left holding the bag. In November 2021, the crypto industry’s market cap reached $3 trillion. Its market cap is now around $1.1 trillion, according to CoinMarketCap. “Every private equity firm is moving on — obviously to the area of artificial intelligence,” says Stark. “And they’re not coming back.”