The US Securities and Exchange Commission (SEC) has recently filed lawsuits against 2 major cryptocurrency platforms, Coinbase and Binance, as part of an intensified crackdown on the crypto industry.
These legal actions represent a significant escalation and could have a transformative impact on a market that has largely operated without extensive regulation. The SEC accuses Binance and its CEO, Changpeng Zhao, of engaging in deceptive practices, while the lawsuit against Coinbase marks a pivotal moment in asserting the SEC’s jurisdiction over cryptocurrencies.
Despite the differences between the cases, they both signal the SEC’s increasingly assertive approach in bringing cryptocurrencies within the purview of federal securities laws. It is worth noting that the SEC has not previously taken on such prominent players in the crypto industry.
“If the SEC succeeds in either case, it will bring about a significant transformation in the cryptocurrency industry.”
According to the Securities and Exchange Commission (SEC) complaint filed in a federal court in Manhattan, Coinbase has allegedly been operating as an intermediary for cryptocurrency transactions since at least 2019, earning billions of dollars while evading disclosure requirements designed to safeguard investors. The SEC claims that Coinbase traded at least 13 crypto assets that qualify as securities and should have been registered, including tokens like Solana, Cardano, and Polygon.
Following the lawsuit, initial estimates from data firm Nansen suggest that Coinbase experienced net customer outflows of approximately $1.28 billion. The shares of Coinbase Global Inc, the parent company, closed down 12.1% at $51.61, having fallen as much as 20.9% earlier in the day. However, the shares have seen a 46% increase this year.
In response to the lawsuit, Coinbase’s general counsel, Paul Grewal, stated that the company will continue its operations as usual and remains committed to compliance.
According to Oanda senior market analyst Ed Moya, the SEC’s actions against cryptocurrency exchanges appear to be an ongoing effort, akin to playing “Whac-A-Mole,” as many exchanges offer tokens built on blockchain protocols that are targeted by regulators. This suggests that the recent lawsuits are just the beginning of a broader regulatory crackdown.
Interestingly, while the crackdown has had a negative impact on some aspects of the cryptocurrency market, such as Coinbase’s net customer outflows, it has paradoxically benefited leading cryptocurrency Bitcoin. After initially dropping to a nearly three-month low of $25,350 in response to the Binance lawsuit, Bitcoin rebounded by over $2,000, surpassing the previous day’s high. As of 0410 GMT, it was trading just below $27,000.
“The stringent actions taken by the SEC against several altcoins are creating significant challenges, which is leading some crypto traders to shift their focus back to bitcoin,” Oanda’s Moya clarified.
Securities, unlike other assets such as commodities, are subject to strict regulations and require comprehensive disclosures to inform investors about potential risks. The definition of “security” was initially outlined in the Securities Act of 1933, but experts often rely on two US Supreme Court cases to determine whether an investment product qualifies as a security.
SEC Chair Gary Gensler has consistently maintained that tokens should be considered securities and has been actively asserting the SEC’s authority over the crypto market.
The focus initially was on the sale of tokens and interest-bearing crypto products, but the SEC has recently expanded its scrutiny to unregistered crypto broker-dealers, exchange trading, and clearing activities.
While a few crypto companies have obtained licenses as alternative system trading systems, which are trading platforms used by brokers for listed securities, no crypto platform currently operates as a fully-fledged stock exchange. The SEC has also filed lawsuits this year against Beaxy Digital and Bittrex Global for their failure to register as exchanges, clearinghouses, and brokers.
According to SEC Chair Gensler, the entire business model of many crypto companies is built on noncompliance with US securities laws, and he is urging them to adhere to the regulations. However, crypto companies argue that tokens do not meet the definition of securities, criticize the ambiguous nature of the SEC’s rules, and claim that the SEC is exceeding its regulatory authority. Nevertheless, many companies have taken steps to enhance compliance, halt certain products, and expand operations beyond US borders in response to the increased regulatory crackdown.
Kristin Smith, CEO of the Blockchain Association trade group, has rejected Gensler’s attempts to oversee the industry and regulate crypto companies.
“We firmly believe that Chair Gensler’s position will be proven incorrect by the courts in due course,” she stated.
Established in 2012, Coinbase had a customer base of over 108 million and held $130 billion in customer crypto assets and funds on its balance sheet as of March. The majority of its net revenue, amounting to $3.15 billion last year, was generated through transactions.
The SEC’s lawsuit against Coinbase, seeks civil fines, the recovery of illicit gains, and injunctive relief.
In the case of Binance, the SEC accused the company on Monday of inflating trading volumes, misusing customer funds, commingling assets improperly, failing to restrict US customers from its platform, and providing misleading information about its controls.
Binance has pledged to vigorously defend itself against the lawsuit and criticized the SEC for its failure to provide clarity to the crypto industry.
Following the lawsuit, customers withdrew approximately $790 million from Binance and its US affiliate, according to Nansen.
The SEC filed a motion to freeze the assets of Binance US, the US affiliate of Binance. The holding company of Binance is based in the Cayman Islands.
“It’s important to note that recent regulatory actions are aimed at ensuring that companies operating in the cryptocurrency industry comply with securities laws and protect investors – that will always be their objective,” commented Joshua Chu, the group chief risk officer at blockchain technology firms XBE, Coinllectibles, and Marvion.
“These developments will ultimately contribute to a more stable and trustworthy industry, which could attract greater institutional investor participation and mainstream adoption.”
