SEC Crackdown on Crypto Exchanges

Legal action has been taken by the U.S. Securities and Exchange Commission (SEC) against two major cryptocurrency exchanges, Coinbase and Binance.US. This move by the SEC is seen as a significant escalation in its pursuit of cryptoasset regulation and an attempt to establish its authority in crypto regulation over  other organizations like the Commodity Futures Trading Commission (CFTC).

While the allegations brought against Coinbase have surprised many in the industry, as the SEC originally allowed Coinbase to IPO and list, the lawsuits against the two exchanges differ substantially.

The SEC’s complaint against Binance spans 136 pages and includes 13 charges related to violations of securities laws. These charges include:

• Operating unregistered exchanges,
• Mishandling customer funds,
• Conducting unregistered offerings,
• Sales of unregistered securities

This complaint draws parallels to the FTX lawsuit, which led to the bankruptcy and downfall of founder Sam Bankman-Fried. The SEC’s complaint also includes testimonies from former senior executives and internal communications.

In contrast, the SEC’s lawsuit against Coinbase focuses solely on registration provisions and does not involve allegations of fraud or misuse of customer funds. The 101-page complaint claims that Coinbase has been unlawfully generating billions of dollars since at least 2019 by facilitating crypto sales and purchases of unregistered securities.

Many perceive the SEC’s claims as hypocritical since the SEC reviewed and approved Coinbase’s business practices before allowing them to go public in an IPO in April 2021. The SEC counters this argument by stating that it identified securities risks before the IPO but that approving a stock offering does not indicate a stance on the legality of the issuer’s underlying business.

Notably, several tokens deemed securities by the SEC are available on both Binance and Coinbase but were not included in either lawsuit. The inconsistencies have raised questions about the SEC’s internal processes and communication. Some publications even suggest that the SEC specifically targeted the tokens listed on Coinbase’s homepage.

Crypto insiders have provided arguments against the SEC’s classification of certain assets as securities under the U.S. Howey Test. For example, there is a strong defense of ATOM and MATIC as non-security assets.

Following the lawsuits, the cryptocurrency markets experienced significant volatility, with many “blue chip” tokens dropping by 20% to 30% in the week since the suits were filed.

To add more complexity to the proceedings, Binance’s legal team has alleged that SEC Chair Gensler offered to advise Binance in 2019. Additionally, Binance opposes the Temporary Restraining Order (TRO) sought by the SEC, suggesting that the SEC manufactured an emergency situation for its own purposes, coinciding with the systematic debanking of the Crypto industry. Binance questions why it took the SEC seven years to serve them papers if they were operating an illegal securities exchange and their business practices haven’t changed significantly in that time period.

For those interested in further details, Bitcoin.com provides a breakdown of Binance’s defense, summarizing the court document without requiring a full read.