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The U.S. Securities and Exchange Commission is taking two of the major crypto exchanges to court. Both have close ties to our country.
The crypto scene is in a tizzy. In a one-two punch, the U.S. Securities and Exchange Commission is taking on two of the world's most important cryptocurrency marketplaces. On Monday, it filed a complaint against the world's largest crypto exchange Binance. On Tuesday, it followed up with a second lawsuit, this time against marketplace Coinbase, the largest provider for buying crypto assets like bitcoin.
U.S. authorities want to tame cryptocurrencies and are resorting to heaping lawsuits to do so. SEC chief Gary Gensler told U.S. broadcaster CNBC, "We don't need more digital currencies." After all, "We already have digital currencies. They're called dollars, euros or yen - they're all digital." With his prime-time appearance, Gensler underscored his reputation as a fierce enemy of cryptocurrencies.
Coinbase and Binance immediately announced they would challenge the lawsuits. Billionaire Binance founder Changpeng Zhao, usually referred to simply as CZ, wrote on Twitter, "If you have to argue with everyone, maybe you're the one to blame."
The US Securities and Exchange Commission (SEC) has taken a decisive stance against the dominant force in the cryptocurrency world, Binance, and its founder Changpeng Zhao, following months of discussions, threats, and warnings. The SEC has accused Binance of operating a deceptive scheme and has brought forth 13 charges against Zhao and his exchange. While Binance caters to numerous everyday investors, the repercussions of these actions are likely to extend far beyond the confines of the online crypto sphere. Binance has established sponsorships with prominent entities such as the Italian football team Lazio, the Argentina national team, and the 2021 Africa Cup of Nations tournament. Additionally, it has made venture capital investments and acquired a $500 million stake in Elon Musk's Twitter.
The SEC's actions seem indicative of a broader crackdown on cryptocurrencies, sparked by the downfall of FTX, a Bahamas-based platform. FTX's founder, US citizen Sam Bankman-Fried, is currently facing charges of securities fraud, money laundering, and other offenses. In a similar vein, the SEC has recently accused another crypto platform, Coinbase, of jeopardizing customer safety by operating as an unregistered broker, exchange, and clearing agency.
What is Binance?
Binance stands as the world's largest cryptocurrency exchange, providing users with simplified avenues to buy and sell cryptocurrencies and other digital assets for nominal fees.
Binance holds a dominant position in crypto trading, accounting for up to 70% of the market last year, with billions of dollars passing through its exchange daily. While increased regulatory pressure has reduced its market share, Binance still represents approximately 50% of monthly crypto exchange volume.
In 2019, Binance faced regulatory scrutiny in the US due to potential violations. In response, the company limited access to its primary exchange, Binance.com, within the US and launched a separate business entity known as Binance.US.
Binance.US offered a narrower range of crypto and digital assets compared to its parent company. Crucially, it positioned itself as a distinct exchange, operating independently of Binance.com, thereby subjecting itself to US regulations and enabling legal operation within the country.
What are Binance and its founder accused of?
One of the central allegations made by the SEC is that Binance and Zhao failed to genuinely separate the US company from the US exchange it spun off from.
Although Binance.US claimed that its customers were prohibited from transacting on Binance.com since 2019, the SEC alleges that Binance and Zhao surreptitiously allowed high-value US customers to continue trading on the Binance.com platform.
According to the SEC, Binance publicly presented Binance.US as a separate and independent trading platform for US investors. However, Zhao allegedly maintained secret control over the US company.
The SEC claims that Binance.US illegally offered commodity derivatives to its US customers, allowing them to speculate on cryptocurrency prices without directly purchasing the assets. Another regulatory body filed a lawsuit in March, asserting that Binance had been offering these services since July 2019 without registering with the derivatives markets regulator.
The SEC complaint includes evidence suggesting that the Binance leadership was aware of violating US regulations. A message from the Binance chief compliance officer to a colleague, presented as evidence in the lawsuit, states: "We are operating as a fking unlicensed securities exchange in the USA bro."
The SEC alleges that assets were redirected to a separate entity owned and controlled by Zhao called Sigma Chain. This entity was involved in "wash-trading," a practice where a trader buys and sells the same asset between their own accounts to artificially inflate trading volume. Through this scheme, the SEC asserts that Zhao inflated Binance.US trading volume.
What is Binance's response?
Binance has stated that it has actively cooperated with the SEC throughout its investigation and "respectfully disagrees" with the allegations.
"We intend to vigorously defend our platform," the company stated in a blog post, while emphasizing that the SEC's actions have limited reach due to Binance not being a US-based exchange.
Binance contends that the SEC, along with other regulators targeting similar cases, is opting for enforcement and litigation rather than a thoughtful, nuanced approach that the dynamic and complex nature of this technology demands.
The company also refutes any claims that user assets on the Binance.US platform have been at risk, stating that such allegations are simply untrue.
What is the significance of this event?
The news of SEC charges against Binance caused the price of Bitcoin, the largest and most traded cryptocurrency, to hit its lowest point in nearly three months. Last year, when FTX, a rival exchange, collapsed, the price of Bitcoin plummeted by approximately 25% within a matter of days. While Binance does not show signs of imminent collapse, the company has assured its customers that their assets are safe and secure, aiming to prevent sudden deposit withdrawals.
Known as "CZ," Zhao is a prominent figure in the crypto industry, particularly following the downfall of his rival, Bankman-Fried.
Is this part of a broader crackdown?
On Tuesday, the SEC announced a fresh set of charges, this time targeting Coinbase, a US-based crypto exchange that has long positioned itself as a reputable platform. However, the regulator argues that Coinbase has operated as an unlicensed securities exchange, brokerage, and clearing agency, thereby endangering customers.
These enforcement actions indicate that the SEC is taking a broad approach towards cryptocurrency firms that it believes are evading regulation, either through blurring the lines between onshore and offshore services (as alleged against Binance) or trading unregulated securities (as alleged against Coinbase).
At the core of the issue lies a fundamental question: Are cryptocurrencies an entirely new phenomenon that requires a unique regulatory framework, or are they simply digital versions of existing financial instruments that the SEC already oversees? The agency believes that a significant portion of the industry falls into the latter category and aims to ensure that crypto companies either comply or cease operations within the United States.
What lies ahead for the crypto industry?
The cryptocurrency sector is currently in the midst of a "crypto winter," marked by dwindling investments and impending regulatory actions. The SEC's interpretation of US law poses potential risks for a wide range of industry players and may prompt companies to seek alternative jurisdictions. However, regulatory havens are becoming increasingly scarce.
In the UK, Prime Minister Rishi Sunak had previously shown support for the sector, with initiatives such as commissioning the Royal Mint to create and sell a collectible "NFT" and urging the Bank of England to provide guidance on stablecoins and central bank digital currencies. Nonetheless, the UK has recently discussed implementing stricter regulations, as Sunak's focus shifted toward artificial intelligence. A May 2023 report from Members of Parliament even called for cryptocurrencies to be regulated as a form of gambling.
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