Exchanging Discontent: SEC Sues Coinbase And Binance
The recent SEC complaints against Coinbase and Binance are major legal moves against the largest cryptocurrency exchanges in the world and will have implications for the industry as a whole.
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SEC Sues Coinbase And Binance
It's been an eventful two days in the crypto ecosystem, with the U.S. Securities and Exchange Commission filing suits against the world’s two largest crypto exchanges, Binance and Coinbase. On Monday, we briefly reported on the SEC’s lawsuit against Binance and its founder, Changpeng “CZ” Zhao, for alleged violations of U.S. securities laws. The SEC’s accusations include misleading customers, misdirecting funds to CZ's personal investment fund, operating unregistered entities and selling unregistered securities, such as BNB and BUSD.
Just one day later, Coinbase was added to the SEC’s list of targets, with the SEC filing a suit against the firm early Tuesday morning. This was not unexpected, considering the fact that Coinbase was issued a Wells Notice by the SEC in March of this year. A Wells Notice is a letter from the SEC stating its intention to legally pursue an enforcement action, giving the entity time to respond/prepare before officially filing. The pushback from Coinbase is that the SEC has refused to provide further guidance as to what defines a security.
On the same day, the SEC filed an emergency motion asking to freeze the assets of Binance U.S. highlighting:
“The SEC respectfully submits that this relief is necessary on an expedited basis to ensure the safety of customer assets and prevent the dissipation of available assets for any judgment, given the Defendants’ years of violative conduct, disregard of the laws of the United States, evasion of regulatory oversight, and open questions about various financial transfers and the custody and control of Customer Assets.”
It’s important to highlight that there’s a clear difference between the accusations of securities violations among both exchanges and the additional allegations against Binance for fraud. Many have known that some form of securities regulation was going to happen across the industry, especially for exchanges, but the comingling of funds and motions to freeze assets is a much more severe accusation.
The SEC accuses Coinbase of listing unregistered securities and offering its staking program without appropriate securities registration, and they further argue that Coinbase previously held the same stance on the nature of tokens as potential securities, citing Coinbase's own document from 2016.
“Since at least 2016, Coinbase has understood that the Supreme Court’s decision in SEC v. W.J. Howey Co., 328 U.S. 293 (1946) and its progeny set forth the relevant test for determining whether a crypto asset is part of an investment contract that is subject to regulation under the securities laws. And, as part of its public marketing campaign to position itself as a ‘compliant’ actor in the crypto asset space, Coinbase has for years touted its efforts to analyze crypto assets under the standards set forth in Howey before making them available for trading.
“But while paying lip service to its desire to comply with applicable laws, Coinbase has for years made available for trading crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities laws. As such, Coinbase has elevated its interest in increasing its profits over investors’ interests, and over compliance with the law and the regulatory framework that governs the securities markets and was created to protect investors and the U.S. capital markets.” — SECURITIES AND EXCHANGE COMMISSION, against COINBASE, INC. AND COINBASE GLOBAL, INC. Filing
Against this backdrop of escalating regulatory scrutiny, both Binance and Coinbase have voiced their disappointment and frustration. In a blog post responding to the charges, Binance argued that the SEC is trying to unilaterally define the structure of the crypto market. They labeled the regulator's approach as an example of “regulation by enforcement,” a strategy they believe is ineffective and detrimental to the U.S. position as a global financial innovator.
Coinbase's response echoed a similar sentiment. During his congressional testimony, Coinbase Chief Legal Officer Paul Grewal criticized the SEC for choosing litigation over legislation, emphasizing the need for transparent and fair rules for digital asset regulation.
Seemingly, the disagreement between the SEC and crypto industry giants is rather simple. The SEC believes that current securities laws, particularly the Howey Test, still stand, while the exchanges think the laws need clarification and updating.
But what are the current guidelines and how will this enforcement action impact the market? Let’s find out…