The SEC is launching an attack on the largest cryptocurrency exchanges.
You might have noticed that Bitcoin and other cryptocurrencies faced some problems on the 5th and 6th of June. This happened because the Securities and Exchange Commission (SEC) accused Binance, Binance Entities, and their owner CZ of various wrongdoing and filed 13 charges against them. Moreover, on the next day, June 6th, the SEC sued Coinbase as well.
We want to inform you about the situation and provide you with important details.
On Monday, the SEC officially started a legal case against Binance. The complaint, which described the violations, was a lengthy 136 pages. If you prefer a condensed version, you can find a summary on the SEC website. It states that today the Securities and Exchange Commission filed charges against Binance Holdings, Binance.US, and their founder for various violations of securities laws.
“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied."
The SEC continues to present new evidence. In the latest court document, the SEC alleges that Changpeng "CZ" Zhao, the CEO of the cryptocurrency exchange Binance, and Guangying Chen, the financial manager of Binance, funneled billions of dollars of customer funds to an offshore trading company called Merit Peak through a holding company named Key Vision Development Limited.
Binance, in turn, did not remain silent, here are the main quotes that were published in the Binance Blog:
"We are disappointed that the U.S. Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief."
"But despite our efforts, with its complaint today the SEC abandoned that process and instead chose to act unilaterally and litigate. We are disheartened by that choice."
"While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously."
"We will continue to cooperate with regulators and policymakers in the U.S. and across the globe because that is the right thing to do."
"Because Binance is not a U.S. exchange, the SEC’s actions are limited in reach."
"Still, we stand with digital asset market participants in the U.S. in opposition to the SEC’s latest overreach, and we are prepared to fight it to the full extent of the law."
Just the next day, the SEC filed a separate lawsuit against Coinbase, the largest American exchange. In its lawsuit against Coinbase, the SEC alleges that it also traded assets that should have been registered as securities. As a result, Coinbase was also engaged in illegal exchange activities.
"You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great. As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
Over the past year, Coinbase has expressed its clear dissatisfaction with the SEC's unwillingness to cooperate, claiming that the organization changes the rules each time the exchange team tries to comply with regulatory requirements. In June 2022, the exchange even published a petition demanding clarity from the SEC. The U.S. Court of Appeals for the Third Circuit has given the SEC seven days to respond to this petition, which may indicate that they will receive support from the judicial system.
The Future Outlook: What Comes Next?
Critics of the organization point to its adherence to history as its weak spot: to determine whether something is a security, the SEC relies on rulings established in the 1930s and 1940s. Supporters of blockchain technology argue that digital assets are too new and unique to be subject to these old laws, and one SEC commissioner has expressed disappointment with the organization's approach of "regulation by enforcement." They believe that new laws need to be created to avoid stifling innovation and economic development in this field.
It's important to note that the SEC's enforcement powers are limited to civil sanctions, and none of the lawsuits against Binance or Coinbase are criminal in nature. The regulatory body has three main tools to go after exchanges.
The first tool is called disgorgement, which means taking away the illegally obtained profits made from violating securities laws. The second tool is an injunction, which can lead to a business being ordered to stop its operations. Finally, the third tool is civil penalties, which are additional sanctions calculated based on the illegally obtained profits.
It is likely that the average cryptocurrency holder should be concerned that if they consistently hold their cryptocurrency on an exchange, it may be challenging to liquidate it and retrieve their funds. The legal dispute between the SEC and Binance or Coinbase may continue for an indefinite period, and this can have an impact on the cryptocurrency market. However, like any regulatory attempts, these measures may have a limited effect on the cryptocurrency market.
Has Much Changed as of This Moment, June 29th?
Cryptocurrency exchange Coinbase has filed a motion to dismiss the case initiated against them by the Securities and Exchange Commission (SEC) for alleged violations of securities laws and operating as an unregistered entity. In its filing, Coinbase asserts that the SEC lacks legal authority to regulate the exchange, and the SEC's position regarding its jurisdiction is "unfounded in terms of the law."
Coinbase claims that the SEC does not have the authority to regulate 12 tokens that the SEC considers securities. The exchange believes that these tokens are not investment contracts as they do not promise to generate profits or fulfill obligations to investors. Even if the SEC has jurisdiction, Coinbase demands that they formally change their interpretation of an investment contract.
The Coinbase petition employs the doctrine of fair notice, citing inconsistencies between the actions and statements of the SEC. The SEC granted the exchange permission to list stocks after a six-month review. Six out of twelve assets were already on Coinbase at the time of the company's registration with the SEC.
Coinbase demands that the SEC does not change its position after 2022 and refrain from pursuing legal action. They claim that the SEC lacks the authority to regulate digital asset exchanges and accuse the SEC of ignoring their requests and resorting to punitive measures instead of engaging in constructive dialogue.
The judge dismissed the request of Binance to prohibit the SEC from making public statements about the case. She stated that the court's intervention is unwarranted, and the SEC's statements do not significantly impact the case.
The Binance legal team filed a lawsuit against the SEC on June 21, accusing the regulator of misconduct in a press release. The SEC had accused Binance and its CEO, Changpeng "CZ" Zhao, of commingling customer assets after an agreement was reached to prevent the freezing of Binance's American customers' assets in exchange for increased transparency and oversight. In its lawsuit, Binance stated that the regulator has "no evidence" that customer assets were "misappropriated, commingled, or otherwise misused," and that its press release was "misleading, contains statements that the SEC knows are not supported by evidence, and fails to adhere to standards of professional conduct."
Judge Jackson also announced the dates for the hearings in the SEC case against Binance and its CEO, where the regulator has brought forth 13 charges, including violations of securities laws and commingling of user funds. Binance is required to present its defense on September 21, followed by the SEC's counter-argument on November 7, and a day for "any necessary replies" on December 12.
The ongoing legal battles between the SEC and Binance or Coinbase raise concerns and have an impact on the cryptocurrency market. However, it is important to remember that regulation should not hinder innovation and development in the cryptocurrency space. The pursuit of creating new laws that consider the unique characteristics of digital assets is an integral part of this process. Cryptocurrency holders should also take security measures and ensure the protection of their funds by choosing reliable platforms and wallets. Together, we can overcome challenges and continue building the future of the cryptocurrency industry based on innovation, transparency, and trust.
AsicXchange will continue to keep you updated on the latest developments in the industry. We are here to support you with any questions or needs you may have regarding our mining equipment offerings. Feel free to reach out to us for more information or assistance.