The SEC is suing Binance and Coinbase for securities law breaches and misappropriation of user assets. The lawsuits escalate the crypto regulatory discussion and affect the crypto business.
Washington regulators are after crypto maximalists, as they have long suspected. The largest crypto asset trading platform in the world, Binance, and its American subsidiary, together with the company’s founder, Changpeng Zhao, were charged with a slew of securities law violations in 13 separate charges by the U.S. Securities and Exchange Commission.
It happened on Monday. The SEC filed a lawsuit against Coinbase on Tuesday, alleging the publicly traded San Francisco business—which is also the second-largest cryptocurrency exchange by trading volume—of earning billions by “illegally facilitating the buying and selling of crypto asset securities.”
The SEC said in its complaint against Coinbase that at least 13 of the more than 250 cryptocurrencies made available to users by the exchange were securities with a combined market value of $37 billion. (It appears that both of these concerns were heavily influenced by the number 13).
The SEC claimed in its lawsuit against Binance, which has its headquarters in the Cayman Islands, that Binance and its CEO, Zhao, had complete control over customer funds on all business platforms. Due to their level of control, Zhao and Binance were able to mix or divert customer funds as they saw fit, including to a company Zhao owned called Sigma Chain that engaged in manipulative trading to exaggerate his exchange’s enormous trading volume.
According to the SEC, Zhao and Binance disguised the fact that they were “commingling billions of dollars of investor assets” and transferring them to Merit Peak Limited, a company Zhao owned. Wall Street knows not to mix customer funds with business funds. The third rail of finance is, quite literally, touching a customer’s funds without their knowledge or consent, and doing so can get you jail time.
SEC Accuses Binance and Coinbase of Violating Securities Laws by Failing to Register
The SEC claimed that Binance and Coinbase violated federal securities laws by failing to register with the commission as a securities exchange, broker, and clearing house.
Coinbase refuted the allegations and blamed the lawsuit on American officials’ murky cryptocurrency regulation. Coinbase CEO Brian Armstrong tweeted that the SEC has just approved the company’s IPO. “We’re proud to represent the industry in court to finally get some clarity around crypto rules,” he said.
Certainly, it is not dishonest for cryptocurrency entrepreneurs to claim that the current regulatory environment is complex. The regulations governing cryptocurrency at the SEC, which has classified it as a security, frequently conflict with those governing cryptocurrency at the U.S. Commodity Futures Trading Commission, which has classified it as a commodity.
“Instead of publishing a clear rulebook, the SEC has taken a regulation-by-enforcement approach that is harming America,” Armstrong said, adding that “the CFTC and SEC have made conflicting statements and don’t even agree on what is a security and what is a commodity.”
In the SEC lawsuit, Binance’s chief compliance officer told a colleague, “We are operating as a fking unlicensed securities exchange in the USA, bro.” One of many devastating charges against Binance for allegedly exploiting consumer monies like FTX.
Binance denounced the SEC’s approach. “We now join a number of other crypto projects facing similarly erroneous SEC actions, and we will vehemently defend our business and the industry,” it stated.
The SEC claimed Zhao had a “disregard” for the law and urged a federal judge late on Tuesday to freeze all U.S. Binance assets anywhere and repatriate any fiat or cryptocurrency held by Binance users.
It appears to be a warning shot for the cryptoverse.