Crypto Crackdown: Coinbase and Binance lawsuits are shaking the markets

In further blows to the cryptocurrency sector, two of its biggest players were indicted this week by the Securities and Exchange Commission: On Monday, the agency filed suit against Binance, the world’s largest exchange, and the next day it charged Coinbase, the only publicly traded stock exchange in the United States, of violating securities laws.

SEC Chairman Gary Gensler has long maintained that most crypto tokens are securities and therefore fall under the agency’s jurisdiction. Many digital asset enthusiasts — including some regulators and legislators — say Mr. Gensler is stretching too far.

There are striking similarities between this week’s cases. The SEC is accusing both Binance and Coinbase of operating stock exchanges and selling digital assets it believes should have been registered. But in its lawsuit against Binance, the SEC also accuses its CEO, Changpeng Zhao, of civil fraud, while the case against Coinbase does not claim fraud or name the company’s CEO, Brian Armstrong, as a defendant.

Here’s what we know so far about the SEC’s crackdown on crypto activity.

The SEC is accusing Coinbase of operating as an unregistered broker.

The SEC said Coinbase made billions of dollars by facilitating the sale of crypto assets as an unregistered exchange and depriving investors of significant protection. The agency has argued that most crypto products are no different from stocks, bonds and other securities, and that companies offering them must register with the agency and make accompanying disclosures, as they would with any traditional exchange or brokerage.

Coinbase and the SEC have had a long public battle over the agency’s stance on digital assets. Last year, Coinbase filed a petition with the SEC for new rules, and in April it sued the agency for not following that petition.

The company has lobbied Congress and called for legislation. Coinbase’s chief legal officer, Paul Grewal, testified before the House Agriculture Committee on Tuesday about a bill released last week that he said would make the rules “clear in practice, not just in theory.” Mr Grewal added: “The solution is legislation, not lawsuits.”

Binance is under fire for about a dozen securities charges.

Binance is accused of funneling billions of dollars in customer money to a company separately owned by Mr. Zhao. The SEC has sued both Mr. Zhao and the company, accusing Binance of a dozen other violations, including misleading investors about the adequacy of its systems to detect and control manipulative trading.

In addition to these charges, Binance, like Coinbase, is accused of operating an unregulated exchange and issuing cryptocurrencies that the bureau said should have been registered as securities. Among them was its own token, which trades as BNB, as well as over 10 other popular tokens. Binance denies the allegations. On Tuesday, the SEC asked a federal court for a temporary injunction freezing Binance’s US assets.

The Commodity Futures Trading Commission also accused Binance of violating commodity laws in March.

What about FTX?

The customer fund mismanagement allegations against Binance are somewhat reminiscent of the charges late last year against the FTX crypto exchange and its founder, Sam Bankman-Fried. But Mr. Bankman-Fried, unlike Mr. Zhao, faces criminal fraud and conspiracy charges, as well as campaign finance law violations.

Prosecutors said Mr Bankman-Fried siphoned billions of dollars in FTX funds from clients to his trading firm, Alameda Ventures, and that Alameda used the embezzled funds for high-risk, highly leveraged bets.

What happens now?

Binance said the SEC was trying to “unilaterally define the crypto market structure”. outright enforcement action and vowed to “vigorously defend our platform,” the company wrote in a post on its website Monday.

Coinbase has similarly said it intends to fight back and will continue to lobby Congress for new legislation. Companies hope that crypto legislation will help remove the blemishes of recent scandals and legitimize an industry that has a reputation for lawlessness.

But lawmakers don’t all share that sense of urgency, and regulation can be slow. The enforcement actions can be done before a bill is passed, leaving hotly debated questions to the federal courts.

From an industry perspective, that indirect path may ultimately work. The Supreme Court has shown a willingness to limit agency power, and crypto lobbyists are well aware of the implications. In the next legislature, the judges will reconsider a doctrine that currently requires courts to defer the expertise of agencies, which could further limit administrative authority.

“We see the potential erosion of one of the key tenets of our case law and a potential change in the scope of administrative agency authority,” said Sheila Warren, CEO of Crypto Council for Innovation, a Washington lobby group representing Coinbase. and others. She added, “It’s getting wild.”