SEC Rocks Crypto World, Sues Coinbase and Binance for Operating Unregistered Exchanges

SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency

The Securities and Exchange Commission today charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

Unregistered Exchange, Broker, and Clearing Agency

According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law. Through these unregistered services, Coinbase allegedly:

–Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;

–Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and

–Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

SEC Files 13 Charges Against Binance Entities and Founder Changpeng Zhao

The Securities and Exchange Commission today charged Binance Holdings Ltd. (“Binance”), which operates the largest crypto asset trading platform in the world, Binance.com; U.S.-based affiliate, BAM Trading Services Inc. (“BAM Trading”), which, together with Binance, operates the crypto asset trading platform, Binance.US; and their founder, Changpeng Zhao, with a variety of securities law violations.

Among other things, the SEC alleges that, while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their own controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform. Further, the SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for U.S. investors, Zhao and Binance secretly controlled the Binance.US platform’s operations behind the scenes.

The SEC also alleges that Zhao and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please, including to an entity Zhao owned and controlled called Sigma Chain….

SEC Complaint Aims to Unilaterally Define Crypto Market Structure

While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously. Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry.

Today’s action is another in a line of examples where, as with other crypto projects facing similar suits, 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. Unilaterally labeling certain tokens and services as securities – even ones over which other U.S. authorities have asserted jurisdiction – only compounds these problems.

What Is Happening With Binance?

Does Binance face other legal challenges?

The Justice Department has been investigating whether Binance should face criminal charges for failing to implement an anti-money-laundering program, according to people familiar with the matter. It couldn’t be learned whether prosecutors plan to charge Zhao, but the CFTC’s complaint said he oversaw “all major strategic decisions,” including dealing with U.S. anti-money-laundering rules.

Does that mean Zhao could face criminal charges as well?

Possibly. Sam Bankman-Fried, the former head of failed crypto exchange FTX, faces criminal charges in the U.S. for what prosecutors allege was a massive fraud at his firm, after agreeing to be extradited here from the Bahamas. The CFTC said Zhao lives in the United Arab Emirates, which doesn’t have a mutual extradition treaty with the U.S.

Airlines Hit with ESG-Backlash Lawsuits

In prior posts, I have noted the growing phenomenon of an anti-ESG backlash. The ESG backlash has taken the form of both legislation and litigation. In the latest examples of ESG backlash litigation, plaintiffs recently have filed two lawsuits against U.S.-based airlines based on the companies’ alleged actions supporting ESG-related initiatives. As discussed below, these latest lawsuits reconfirm that it is not the ESG laggards that are getting hit with ESG-related litigation; rather, the lawsuits are coming against companies that are taking ESG-supportive initiatives.

SEC Mix-Up Leads It to Drop Cases Tied to KPMG Cheating, Cochran

The SEC dismissed enforcement actions involving several high-profile securities cases, including those involving two people at the center of KPMG’s cheating scandal and several cases that wound up before the Supreme Court.

All 42 dropped cases, which involved the agency’s administrative law judges, were caught up in a server issue that allowed enforcement staff access to information meant for adjudication staff, according to an order the Securities and Exchange Commission posted Friday. The commission also addressed at least 46 other cases in a separate order granting petitions to vacate bars on associating with industries including investment advisers and municipal securities …

Elon Musk Had Fun With Dogecoin

Still there are other problems with the lawsuit. One problem is that the plaintiffs are suing Musk for insider trading and securities fraud, which only works if Dogecoin is a security. Is it? Well. Almost every cryptocurrency, other than Bitcoin and maybe Ether, is probably a security under US securities law, at least in the view of the US Securities and Exchange Commission (which I think is mostly correct). But Dogecoin? The rule is that “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others” makes something a security, and virtually every crypto project, with its promise of wealth from some blockchain ecosystem, probably qualifies. Except Dogecoin! Dogecoin is just a joke about a dog. The guys who invented it were explicitly joking, and have gone around telling people it is stupid. This is not a crypto token that was sold to raise money to build out a blockchain enterprise. It is a pure joke with no enterprise at all, which makes it probably not a security.

SEC Regulatory Net Covers $115 Billion of Crypto After Binance Suit

The list of digital tokens deemed as unregistered securities by the Securities and Exchange Commission now spans over $115 billion of crypto after the US agency’s lawsuit against Binance Holdings Ltd.

The regulator in the complaint on Monday cited a dozen coins as assets that fall under its purview. Such a designation comes with strict investor protection rules and could make the tokens harder to trade if exchanges shy away from listing them for fear of falling foul of the SEC.

Binance’s BNB — which has a market value of $44 billion — stablecoin BUSD, Cardano’s ADA, Solana’s SOL, Polygon’s MATIC, Filecoin’s FIL and Algorand’s ALGO were among those mentioned in the lawsuit. When added to other tokens like XRP separately targeted by the SEC, the agency has now categorized over $115 billion of coins specifically as unregistered securities.

The SEC Revolving Door and Comment Letters

We first examine what types of firms hire former SEC lawyers. Among other determinants, we find that older and larger firms, those with a history of litigation, and those that do not use highly-ranked audit firms, are more likely to hire former SEC lawyers over other lawyers. This suggests that financial and repetitional concerns, and the risk of litigation and misstated financials, may contribute to the decision to hire a former SEC lawyer. In order to mitigate selection bias, in our analyses we propensity-match conversations involving former SEC lawyers against those involving other lawyers along lawyer and law firm characteristics, the issues raised in the initial comment letter, and firm characteristics.

Binance was sued by the SEC. It looks like FTX but worse.

If the SEC’s complaint against Binance is sound, it may turn out CZ was doing a little projection, and that his own huge exchange was engaged in some of the same alleged criminality that earned SBF an ankle monitor and an upcoming federal trial of his own. Plus, considering that the FTX fallout helped plunge the crypto market into a recessionary hole it’s yet to climb out of, it’s more than certain these Binance charges will wrack the digital-asset economy even further. Already, in response to the news, various cryptocurrencies have plunged in value—not at all surprising, since many of them were traded on Binance itself.

So, what does this all mean in the near term? Is Binance the new FTX? If so, is the crypto economy doomed? And is CZ the new SBF? Are there too many acronyms?? (Absolutely.) Here are the key charges from the SEC’s 136-page lawsuit, and what they mean for both crypto and the rest of the economy.