When a US Regulator Slams Crypto: A Week in Review

Earlier this week, the US Securities and Exchange Commission (SEC) brought simultaneous lawsuits against two leading cryptocurrency exchanges, Binance and Coinbase. Utilising their influence, both exchanges decided to fight the legal battle.

Lawsuits against Two Exchanges

The US securities regulator's on-and-off investigations against big crypto players were known for a while. On Monday, it went public with the lawsuit against Binance, its two affiliated entities, and the Founder/CEO, Changpeng Zhao. The 13 charges against the defendants include operating illegal trading platforms, offering unregistered crypto asset securities, and commingling customers' funds.

A court filing revealed that the US securities market regulator started investigating Binance in 2020.

When the crypto industry was still reeling from the actions against Binance, the SEC announced another lawsuit on Tuesday against the America-listed crypto exchange, Coinbase. The charges against this exchange include operating an illegal trading platform that offered unregistered crypto asset securities; the SEC also accused Coinbase of offering a staking-as-a-service program without authorization.

Consecutive Court Motions

Following the lawsuit, the SEC filed multiple motions in court against Binance: the regulator is seeking permission to freeze the assets of Binance.US. According to the court filing, Binance moved $12 billion in customer funds to entities controlled by the CEO, Zhao.

The allegations against Binance and Zhao are grave. Though the US operations of Binance were independent on paper, the lawsuit included statements of executives who admitted that Zhao and Binance.com ultimately controlled the executive decisions at Binance.US.

BAM Trading officially operates Binance.US without Zhao in any of its executive roles. However, BAM Trading employees referred to the controls of Zhao and Binance on the company as 'shackles' that prevented them from understanding and freely operating the US platform. A former CEO of BAM Trading even told Binance's CFO that her "entire team feels like [it had] been duped into being a puppet."

Binance's Actions

Experts believe that the SEC's lawsuit might not damage the global dominance of Binance but would break Binance.US. Indeed, the US affiliate has already made some harsh operational decisions.

Binance.US indefinitely suspended its over-the-counter (OTC) operations and removed 10 crypto pairs listed against BTC and BUSD. The SEC's complaint alleged BNB and BUSD to be unregistered securities and labeled 10 other cryptocurrencies listed on the exchange in this category.

The operational changes of Binance.US continued today (Friday); it announced the suspension of USD deposits and warned that its payment partners would terminate withdrawal support by June 13. Now, the exchange is going all-crypto and indirectly has asked its users to withdraw USD funds immediately.

Meanwhile, in a memo seen on Thursday by Chinese crypto media Odaily Planet Daily, Zhao reportedly cautioned staff members about their communication, noting that "everything you say may appear in court (or on the internet) one day," according to Google translation of the media outlet's report. The Binance CEO further reportedly called the SEC's use of its employees' chats "ridiculous."

Political Side Is Heating Up

The lawmakers are now also taking an interest in the alleged illegal operations of Binance in the US. Two Democratic senators, Elizabeth Warren, and Chris Van Hollen, sent a letter to the Attorney General, Merrick Garland seeking a Department of Justice investigation into the exchange. They alleged that Binance and its US affiliate might have lied to Congress about business practices.

"This is a serious matter," the letter stated. "While Mr Zhao has claimed that Binance.US is a 'fully independent entity', in reality, he controls the company as a 'de facto subsidiary' of Binance."

What Is Happening with Coinbase?

Coinbase, which is also facing an SEC lawsuit, is a public company. Its shares took a heavy dent since the SEC sued the company. In the last five trading sessions, the Nasdaq-listed company (Nasdaq: COIN) lost more than 15.6 percent of its value but recovered from the button it hit on Tuesday.

Unlike Binance, Coinbase is not accused of any customer fund misappropriation or shady business practices. The SEC alleged that it functions as an exchange, brokerage, and clearing agency, which are separate under US laws, without registering to engage in these activities.

The SEC's Chair, Garry Gensler, in a speech yesterday (Thursday) at the Piper Sandler Global Exchange & Fintech Conference, stressed that existing US securities rules applied to crypto platforms, and they must separate "the exchange, broker-dealer, and clearing functions."

Gensler thinks separating the three functions will "help mitigate the conflicts that can arise with the commingling of such services."

"With wide-ranging noncompliance, frankly, it's not surprising that we've seen many problems in these markets. We've seen this story before. It's reminiscent of what we had in the 1920s before the federal securities laws were put in place. Hucksters. Fraudsters. Scam artists. Ponzi schemes," he added.

However, Coinbase confirmed that it will not shutter its staking service, which, according to the regulator, is illegal. Earlier, the SEC reached a settlement with Kraken that led to the exchange shutting its staking service.

The Tackle of Binance and Coinbase

Both Binance and Coinbase are now defending themselves publicly and trying to get public discourse in their favor. The US courts will decide the fate of the lawsuits, but the exchanges need public trust in their business to operate smoothly.

In an official response to the SEC lawsuit, Binance said that the allegations concerning users' assets on its US trading platform are at risk and "simply wrong," adding that: "there is zero justification for the [SEC] Staff's action in light of ample time the Staff had to conduct their investigation."

On top of that, the exchange alleged that the SEC abandoned its efforts to reach a negotiated settlement to resolve the investigations and rushed "to claim jurisdictional ground from other regulators" rather than seek to serve the interest of investors.

Coinbase's CEO additionally responded to the SEC allegations with a tweet, stating the team is "confident in our facts and the law." He also highlighted that the accusations against Coinbase differ from Binance, though he only mentioned "others out there" without naming Binance.

The lawsuits came after Binance.US and Coinbase received a Wells Notice from the SEC.

Gensler Is the Target

Both Binance and Coinbase are at present directly attacking Gensler, who believes most cryptocurrencies can be categorized as securities. His stance on crypto has dramatically changed over the years.

The lawyers of Binance sent a letter to the SEC, revealing that Gensler "offered to serve as an advisor" to the crypto exchange and want him to recuse from the legal case.

"Mr Gensler should have been recused from any consideration in this matter based on this history and the prospect that Mr Gensler may be a material fact witness," the letter added. "To date, the Staff has never confirmed whether Mr Gensler has recused himself, and if he has not, the Commission's explanation for why not."

While speaking at a conference, Coinbase's CEO called Gensler an "outlier" and revealed that the exchange approached the SEC for registration but received an "icy reception" from the Commission's Chair at the first meeting.

Insider Trading?

Binance is a private company, but Coinbase is public. A day before the SEC brought the lawsuit against Coinbase, its CEO sold a significant amount of his shares in the company, a regulatory filing revealed.

Armstrong sold 29,730 shares of the company on June 5 before Coinbase shares plummeted with an initial dip of 20 percent. However, the transactions look planned, as Armstrong has been selling Coinbase shares regularly since last November. He submitted a 10b5-1 plan last August, notifying the regulator time and size of the transactions in advance.