The SEC’s lawsuits against Binance and Coinbase allege that the crypto exchanges violated a variety of securities laws. The cases are vastly different, though.
The US Securities and Exchange Commission (SEC) is cracking down on crypto this week, hitting two of the largest crypto exchanges with separate lawsuits.
Binance and Coinbase will face off with the SEC in probably yearslong federal court proceedings following the significant accusations the agency brought forward. No matter how these cases end, what comes out of them will surely change and shape the entire crypto industry moving forward. This is not just about the future of Binance and Coinbase’s businesses; it’s about learning the operational parameters and regulations that the crypto industry may have to abide by in the US.
Here’s a breakdown of what we know so far about the crypto-focused lawsuits.
Binance vs. the SEC
The SEC’s lawsuit against Binance comes after US regulators carried out a lengthy investigation into the largest crypto exchange on the market and its leader, Changpeng “CZ” Zhao. The 136-page complaint details 13 charges that span a variety of securities law violations, including operating unregistered exchanges, mishandling of customer funds, and the unregistered offer and sale of securities. It also includes testimonies from former senior Binance.US executives and outlines some internal Binance communications.
Ultimately, the SEC is pushing to prohibit Binance and CZ from doing any business on American soil.
“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” SEC Chair Gary Gensler said in an official press release from the SEC. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
Binance’s lawsuit draws parallels to the FTX lawsuit that resulted in bankruptcy and disgraced founder Sam Bankman-Fried‘s downfall. The SEC alleges that Binance misused customer funds and even transferred some into a private entity called Merit Peak Limited, which is run by CZ. The commission said the company has been using customer funds to purchase its own stablecoin and native token, BUSD. The SEC believes Binance used Merit Peak’s bank accounts to transfer funds between its trading platforms.
Similarly with FTX, the main Binance platform is for all the company’s international operations and trading, while Binance.US is reserved for US investors. The SEC said there is no clear separation between the two businesses, which there should be.
There’s a bit of irony in these two cases showing similarities since Binance almost acquired FTX last November ahead of the company’s downfall. Binance ultimately announced that it wouldn’t pursue the acquisition of FTX.com due to “reports regarding mishandled customer funds and alleged US agency investigations.” Binance does operate as a private company, just as FTX did, so there are parts of its business operations that likely won’t get shared unless subpoenaed in court.
The SEC’s lawsuit against Binance and CZ comes a few months after the Commodity Futures Trading Commission filed a similar suit against the company and its leader. Despite having more than one serious case on his hands, CZ doesn’t seem to be too phased by the SEC’s actions.
Still, Binance quickly released a statement in response to the SEC’s lawsuit, declaring that it will vigorously defend its platform from being shut down by the agency. US regulators have been looking into the Binance.US business operation for quite some time, so the lawsuit doesn’t come as a surprise since Binance previously said it would cooperate and pay penalties to resolve investigations. The company also said in the statement that it agreed to cooperate with the SEC, and “engaged in extensive good-faith discussions to reach a negotiated settlement.” Binance said the agency abandoned negotiation plans instead to rush to litigation to make headlines. The crypto exchange also said that all assets on its platforms are safe and secure and haven’t been mishandled in any way.
The SEC filed an emergency motion late Tuesday night in a federal Washington, DC, court to freeze all Binance.US assets. The agency is attempting to freeze the crypto exchange’s US bank accounts to allegedly block CZ from moving any customer funds around.
Binance raised a good point in its response about the SEC’s “misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry.” This is true since there aren’t clear regulations set around the crypto industry or how decentralized finance platforms are allowed to operate. This is the same discussion that Coinbase has been pushing the SEC to have for years now, yet the crypto exchange was also sued this week by the federal agency.
Coinbase’s suit differs from Binance’s, though. Let’s take a deeper look at the high-level takeaways in that one.
Coinbase vs. the SEC
The SEC’s lawsuit against Coinbase solely focuses on registration provisions and doesn’t include any allegations of fraud or misuse of customer funds. It came a day after the litigation against Binance, which one could argue is no coincidence.
The agency is suing Coinbase for allegedly operating as an unregistered national securities exchange, broker, and clearing agency. A broker helps investors buy and sell securities, while a clearing agency makes sure the deals go through on both ends. The crypto exchange was also charged for failing to register its staking-as-a-service program, which it offers and sells crypto assets through. Unlike Binance’s suit, Coinbase CEO Brian Armstrong and any other executives were not individually named as defendants in the lawsuit.
The 101-page complaint claims that Coinbase has been illegally making billions of dollars since at least 2019 for facilitating crypto sales and purchases. This is a bit contradictory since the SEC did review and approve Coinbase’s business practices before the crypto exchange went public in April 2021. The agency detailed that Coinbase still showed securities risks before going public, and approving the stock offering is not an “opinion on, or endorsement of, the legality of an issuer’s underlying business.”
The SEC alleges that Coinbase didn’t register any of its services, which ultimately denies investors certain protections.
The agency is also claiming that 13 digital assets listed on Coinbase’s platform are considered crypto asset securities, including FLOW, SAND, and native tokens for Axie Infinity, Near Protocol, and others. Nearly half of the complaint focuses on providing context on why these tokens are securities and not on the apparent laws Coinbase broke for listing them.
As for Coinbase’s staking service, the crypto exchange updated its staking model in March in hopes of avoiding attention from the SEC. The service leverages the proof of stake mechanism to allow customers to profit off of staking their crypto assets. The SEC is accusing Coinbase of avoiding registering this service.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” SEC Chair Gary Gensler said in an official news release from the SEC. “In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections.”
Coinbase shares were down as much as 12% on Tuesday after the SEC lawsuit news hit, and they were already down 9% on Monday when the Binance lawsuit came out. The crypto exchange has already regained roughly 3% of its value compared to yesterday and is trading at around $53.26 at the time of this writing.
Ultimately, the SEC is looking to make Coinbase pay civil penalties and didn’t share any indication of further litigation outside of that at this time. Earlier this year, US crypto exchange Kraken paid $30 million in fines to the SEC to end an investigation into its staking investment program, which is similar to Coinbase’s offering. As it currently stands, Coinbase has no plans to delist any of the tokens named in the SEC lawsuit.
Armstrong shared some thoughts on the lawsuit, claiming that there is no clear path to register its business practices. Coinbase has been calling on the SEC to hone in on crypto regulations, and Armstrong sees this lawsuit as an opportunity to get in front of a court to hopefully get some much-needed questions answered.
Armstrong has been making a few media appearances, most recently on CNBC’s Squawk Box Wednesday morning, where he said, “the companies could really not be more different, and the suits could not be more different,” when talking about Coinbase and Binance’s dealings with the SEC.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Coinbase’s Chief Legal Officer and General Counsel Paul Grewal said in a statement. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
Coinbase also released a short video that states that the company met with the SEC more than 30 times last year to ask for guidance on how to comply with regulations, yet the agency hasn’t set any real rules around the crypto industry. Coinbase also claims that it has rejected 90% of assets because they don’t pass legal standards.
TuongVy Le, a former SEC chief counsel, agreed with Armstrong’s thoughts on Twitter and said the SEC is being counterproductive by suing instead of developing a framework for crypto regulations and working alongside Congress to solidify some policies. Le formerly advised SEC officials and staff on various legislative and policy matters, including the regulation of digital assets, per her Linkedin profile.
“No allegations of fraud, just accusing @coinbase of failing to do the impossible,” Le continued on the Twitter thread. “This is why regulation-by-enforcement hurts investors & creates chaos and confusion in the markets – the opposite of the SEC’s mandate. What’s more, SEC approved Coinbase to sell its shares to the public – meaning not just crypto investors but Coinbase shareholders will be hurt.”
Expect to see Coinbase in a New York federal Court soon to go up against the SEC.
What Happens Next?
In these lawsuits, the SEC ruled that Binance’s native tokens, BNB and stablecoin BUSD, Solana, and native tokens for the Polygon and Cardano blockchains, and others are securities. The agency didn’t name crypto solutions provider Ripple’s native token in that list, even though it’s wrapped up in another SEC lawsuit for allegedly selling unregistered securities, including its own. It seems like the SEC is kind of shooting in the dark here, and seeing what sticks, when in reality, the agency has the power to gather leaders from all the top crypto exchanges to outline some rules and regulations.
The real question is, which cryptocurrencies qualify as securities, which don’t, and why? It’s clear the SEC still can’t answer that.
We all know these cases could end in a few different ways. They could collapse, as FTX did, or they could pay some pretty hefty fines. Unlike FTX’s downfall, both Binance and Coinbase are still operating as usual and doubling down on their legitimacy.
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