All eyes are on the US: The SEC sues Binance and Coinbase All eyes are on the US: The SEC sues Binance and Coinbase All eyes are on the US: The SEC sues Binance and Coinbase

All eyes are on the US: The SEC sues Binance and Coinbase

Mads Eberhardt

Cryptocurrency Analyst

Summary:  The US Securities and Exchange Commission has been busy this week. The agency sued Binance on Monday claiming that the world’s largest exchange commingled billions of dollars of customer funds, engaged in wash trading, and operates an unregistered securities exchange, among other claims. The SEC followed up the next day by alone suing Coinbase for running an unregistered securities exchange. The claims put forward against Binance bring to mind the collapse of FTX in November 2022, bringing the industry to its knees. The security allegations against both Binance and Coinbase present an existential matter for the crypto industry, as the classification of many cryptocurrencies as securities would negatively impact the market for years to come, including the financials of Coinbase, among other industry actors.


We have covered the regulation of crypto fairly extensively during 2023, in which year the Securities and Exchange Commission (SEC) in the US has been deeply active in the crypto market in the wake of the collapse of crypto exchange FTX in late 2022. The SEC stays the course with a remarkably eventful week so far. On Monday, the SEC sued the world’s largest crypto exchange Binance, including its co-founder and CEO Changpeng Zhao (CZ), in advance of doubling down by suing the largest US-based exchange Coinbase on Tuesday. Despite a few similarities between the allegations against Binance and Coinbase, they differ significantly, causing the allegations against Binance to be vastly harsher relative to the ones against Coinbase.

Binance allegedly commingled customer funds

The agency raised severe allegations against Binance, worst of all that Binance and its US entity named Binance US commingled billions of dollars of customer funds in cryptocurrencies to an account held by an entity controlled by CZ. Later, the funds were transferred to a third party reportedly with the purpose of buying and selling crypto assets, some of which are believed to have been used in market-making activities. If this is accurate, it awakens memories of Sam Bankman-Fried’s alleged commingling of client funds from FTX to Alameda Research.

Also, the SEC claims that another firm owned by CZ engaged in wash trading to boost the trading volume of at least Binance US. US residents are not allowed to trade on Binance due to regulatory requirements, so Binance launched Binance US for US residents a few years ago under a distinct entity stripped of a lot of products otherwise accessible to non-US residents. Despite legal requirements to maintain a Chinese wall between Binance and Binance US, the SEC believes that Binance’s off-shore operations, including CZ, retained jurisdiction over Binance US. The SEC has requested a temporary restraining order to freeze Binance US assets. Among additional allegations, the SEC makes the case that the company operates an unregistered securities exchange by facilitating trading of what the agency claims to be securities.

The allegations made against Binance are deeply serious and somewhat alarming. Indeed, Binance has not been found guilty as charged yet if it ever will. However, market participants must consider the risk that the SEC is correct in its claims. This would arguably imply strict legal consequences for Binance and CZ, creating a chain reaction across the industry, similar to FTX in November 2022, considering that Binance is by far the largest and most liquid crypto exchange. Binance stated that: “… we have engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations” and that user assets on Binance US have never been at risk.

Coinbase says it is not securities, whereas the SEC says it is

It is likewise the concern of securities that turns our attention toward the SEC’s lawsuit against Coinbase. On Tuesday, the SEC sued Coinbase for operating as an unregistered securities exchange, as the SEC believes that Coinbase handles securities on its platform by claiming that prominent cryptocurrencies such as Solana, Cardano, Polygon, and Filecoin, among others, are securities. The SEC does not mention Ethereum as a security. However, the agency argues that the staking service of Coinbase, including for Ethereum, is an investment contract, causing the product to involve securities. For information, we have previously published an analysis describing what securities are, along with the rather harsh implications provided that a cryptocurrency is deemed a security.

Contrary to the SEC’s view, Coinbase has previously stated that they do not engage in securities, arguing that the cryptocurrencies in question and the firm’s staking service are not securities. Following the lawsuit, Coinbase’s co-founder and CEO Brian Armstrong stated that Coinbase is going to fight the SEC in court and that they will not end their staking service at this time.

Much as the accusations against Coinbase are greatly less significant than the agency’s claims against Binance, then this matter should not be underestimated too with respect to not only Coinbase but the crypto industry as a whole. The question of whether cryptocurrencies are securities or not appears as an existential matter for the crypto industry, as the classification of most cryptocurrencies as securities would force exchanges appealing to US residents to face much more regulatory scrutiny if allowed to deal with these cryptocurrencies at all. To make matters worse, other countries may from then on follow the lead of the US, causing the security label to be the fate of most cryptocurrencies around the world. For Coinbase, if the SEC wins in court, the firm must in the worst case delist the majority of crypto assets and cease its staking product, leading to a significant blow to the company’s financials, so a lot is at stake. Yet, only time will tell how it ends.

The author holds a Coinbase Global, Inc. (COIN) long position.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.