Every crypto exchange is violating securities law, says the U.S. Securities and Exchange Commission (SEC).
This, as the U.S. regulatory agency goes for the domestic digital asset sector’s throat with a sweeping one-two punch targeting both Binance, the biggest global crypto exchange and Coinbase, the biggest U.S. crypto exchange.
Already, the two exchange’s CEOs have had their paper fortunes slashed as a result of the scrutiny.
They probably saw it coming. In April, the SEC sued crypto exchange Bittrex for allegedly operating an illegal securities exchange, making it clear that similar cases were coming to the firm’s peers.
Still, the lawsuits mark a sharp escalation of the SEC’s efforts to rein in the crypto industry as the Gary Gensler-chaired regulator decides that after a year full of fraudulent evaporations and disastrous bankruptcies as exemplified by the November blowup of the crypto exchange FTX and the rapid fall from grace of its founder, Sam Bankman-Fried, innovation run amok might be worth stifling.
FTX’s collapse burned millions of investors and incinerated untold billions of paper wealth. Bankman-Fried, the firm’s founder and leader, has been criminally charged with over a dozen counts of fraud and conspiracy.
FTX is accused of having used its overly-close relationship with Alameda Research, a trading firm controlled by Bankman-Fried, to misappropriate and improperly deploy customer money.
The SEC has levied charges against Binance’s founder, crypto billionaire Changpeng Zhao, alleging that he mixed billions of dollars in customer funds and secretly sent them to separate companies he controlled, such as Sigma Chian and Merit Peak Limited, which received more than $20 billion — including commingled customer funds.
That’s why on Tuesday (June 6), as reported by PYMNTS, the regulatory agency requested that a U.S. federal judge freeze the assets of Binance.US and repatriate funds to the crypto exchange’s customers.
“The SEC respectfully submits that this relief is necessary on an expedited basis to ensure the safety of customer assets … 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,” read the emergency motion.
Like FTX, Binance mints its own token called BNB, whose utility and value are tied almost directly to the exchange’s ongoing viability as a business, and the exchange also maintains its own affiliated trading firms and keeps its U.S. platform separate from its global crypto exchange — all strategies employed by Bankman-Fried in the leadup to his firm’s implosion.
In its public response to the SEC suit, Binance stated that “the Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology … the SEC’s actions undermine America’s role as a global hub for financial innovation and leadership.”
The exchange added that it intends to “vigorously defend” its platform and U.S. operations in court.
What’s worrying about the Coinbase lawsuit, at least for Coinbase — which operates in a much less opaque manner than Binance does — is that if the SEC’s suit is victorious, the U.S.-based exchange, which generated over 80% of its revenue at home in the U.S. last year, will find itself facing a damningly critical threat to its business model.
That’s because, compared to its peer exchanges, Coinbase is the squeaky-clean, good kid in class.
The exchange is a public U.S. company listed on the Nasdaq and incorporated in Delaware. The firm already files extensive financial disclosures with the SEC and is subject to regular audits by accounting firms.
Accordingly, the SEC complaint against Coinbase is drily laser-focused on the fact that Coinbase has not registered as a securities exchange, despite, in the agency’s view, operating as one.
From the regulator’s perspective, the existing rules for securities exchanges require the separation of three core functions: An exchange that matches buyers and sellers, a broker-dealer that trades on behalf of customers and the clearinghouse that moves the money and securities to protect investors.
Crypto exchanges, including Binance and Coinbase, typically combine all three of these functions. From their point of view, cryptocurrencies are not securities; therefore, the existing rules don’t apply to them.
Coinbase bet the house on the possibility of running a legal and compliant crypto exchange in the U.S. The SEC is saying that because crypto assets are securities, that may be impossible.
If the SEC wins and the majority of cryptocurrencies are defined in court as securities, the asset class will become more or less banned in the U.S.
Regardless of the outcome, the world’s venture capitalists, investors, and media pundits appear to all have moved on to artificial intelligence anyway.
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