The Securities and Exchange Commission filed back-to-back lawsuits against Coinbase and Binance in June as it looks to rein in the crypto industry. These moves come after a series of enforcement actions against crypto companies to establish why its regulations apply to crypto activities. And they could have enormous repercussions over the coming months.
In this article, you’ll learn why these lawsuits matter and how they affect the nascent crypto industry.
The SEC began with a lawsuit against Binance, the world’s largest crypto exchange, alleging it operated an illegal trading platform in the U.S. and misused customers’ funds. In addition to failing to register as an exchange, the SEC alleges that the firm commingled billions of customer assets and sent them to a related third party liquidity provider.
The move comes after Binance.US CEO Brian Brooks abruptly left the job after three months in August. While the top banking regulator could have helped set the exchange on a more favorable path with regulators, he reportedly had little autonomy over the direction of the supposedly-independent operations of Binance.US.
Brooks testified that Binance.US heavily depended on two liquidity providers, making them a significant control person and economic counterparty. And at a certain point, he says it became clear that these counterparties were the CEO of Binance.US and not him. The SEC further alleges these LPs acted as a pass-through for customer funds (commingling them).
The SEC complaint asks a federal judge to freeze Binance’s assets and appoint a receiver to track and preserve users’ assets. However, the bar for freezing assets is relatively high – regulators must demonstrate they’re likely to succeed in the case and need emergency actions to protect against imminent danger to investors.
Shortly after suing Binance, the SEC filed a lawsuit against Coinbase, alleging that it violated rules to register as an exchange, brokerage, and clearing agency before trading at least 13 crypto assets it deems securities. In addition, the agency believes that the company’s Coinbase Earn staking program is an unregistered security.
Binance intends to defend its platform and denied allegations that user assets were ever at risk. In a statement, the company said all user assets on Binance and Binance-affiliated platforms are safe and secure. They accuse the SEC’s abrupt actions as an attempt to rush the claim to the jurisdictional ground rather than protect investors.
Meanwhile, Coinbase also pushed back against the SEC’s lawsuit, accusing the agency of taking an “enforcement-only approach” without offering any clear rules or guidance. After receiving a Wells notice in March, the company said it had already met with the SEC more than 30 times over nine months to try and register unsuccessfully.
For their part, federal judges also remain divided on the topic. For example, Judge Michael Wiles recently said in the Voyager case that, “Regulations themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities […] subject to securities laws.”
The lawsuits have significantly impacted the crypto markets over the past few weeks. Bitcoin prices initially fell sharply lower from $27,000 to a low of under $25,000 before regaining ground. However, Ethereum and other prices haven’t recovered as quickly – perhaps because the SEC hasn’t explicitly said they were not securities (as it has with Bitcoin).
Binance and Coinbase have seen their assets suffer much more in the aftermath. Coinbase (COIN) shares fell from around $65 to $50 before recovering some ground, while $BNB dropped from around $310 to the low- to mid-$200s. These assets could continue to see volatility while a resolution works its way through the courts.
Meanwhile, many large market makers and other institutional investors have sought ways to reduce exposure to Binance following the allegations of commingling customer funds – particularly after the spectacular collapse of FTX for doing the same. However, the exchange’s large presence makes it difficult to diversify assets off the platform fully.
That said, while the accusations against Binance are more severe, the world’s largest exchange has less riding on any decision. Coinbase’s operations are overwhelmingly based in the U.S., making any loss extremely detrimental to its business. As a result, the company’s stock price fell sharply lower after the SEC’s lawsuit.
The SEC and Binance reached a deal on June 17, enabling the exchange to continue operating in the U.S. after it agreed to repatriate all assets held for the benefit of its U.S. trading customers. In particular, Binance will have to create new digital wallets for U.S. customers and transfer assets to them within two weeks to comply with the order.
A Washington D.C. federal judge also ordered the SEC to oversee any spending by the defendant on anything other than ordinary business expenses. And the defendants are prohibited from destroying any records associated with their U.S. operations. However, the lawsuits themselves could take months to play out and reach a resolution.
Crypto investors and enthusiasts should keep an eye on these developments, given their potential to send shockwaves throughout the crypto markets over the coming months. If successful, the SEC could prevent many crypto tokens from trading in the U.S. unless they’re registered as securities and traded on a licensed exchange.
The Bottom Line
The Securities and Exchange Commission has been using enforcement actions over the past few years to establish its jurisdiction over the crypto markets. In early June, the agency escalated these efforts by filing lawsuits against Binance and Coinbase – two of the largest exchanges in the world – alleging they’re trading in securities without registration.
If you trade crypto assets, ZenLedger can help ensure that you remain compliant with the IRS. The platform automatically aggregates trades across wallets and exchanges, computes your capital gains and losses, and generates the tax forms you need to file. And you have access to a single unified ledger to prove your compliance.