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The Securities and Exchange Commission (SEC) sued cryptocurrency exchanges Binance and Coinbase this week, ramping up its crackdown on the crypto industry and alleging the exchanges knowingly violated securities laws that are designed to protect investors.
In its lawsuit against Binance and the exchange’s founder, Changpeng Zhao, the SEC alleges that Binance illegally operated as an exchange in the U.S. and misused customer funds by diverting them to a trading entity controlled by Zhao that was used to inflate Binance’s trading volume. All in all, the SEC brought 13 charges against Binance and Zhao, including failing to register as an exchange, broker-dealer and clearing agency, and the offering of unregistered securities.
“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. “They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
The lawsuit asks a federal judge to freeze Binance’s assets and appoint a receiver, a step that is typically taken when fraud is involved and customer assets are at significant risk.
“We have actively cooperated with the SEC’s investigations and have worked hard to answer their questions and address their concerns,” Binance said in a blog post. “All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure, and we will vigorously defend against any allegations to the contrary.”
Coinbase, the largest crypto trading platform in the U.S., was also charged with failing to register as an exchange, broker-dealer and clearing agency, and the unregistered offer and sale of securities related to its staking program.
“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,” said Gurbir Grewal, director of the SEC’s division of enforcement. “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.”
In response to the lawsuit, Coinbase called for legislation around digital assets.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Coinbase Chief Legal Officer and General Counsel Paul Grewal said in a statement. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
The SEC lawsuit says Coinbase traded at least 13 cryptocurrencies that are securities and should have been registered with the agency. The list includes some of the most popular cryptocurrencies such as Solana, Cardano and Polygon, all of which traded lower following the announcement of the lawsuit.
How crypto trading could be impacted
While the outcome of the lawsuits are unclear, it could lead to reduced liquidity for certain crypto assets if either exchanges are unable to offer trading, either permanently or temporarily. Trading cryptocurrencies has always been a speculative endeavor, but in light of the SEC’s allegations, investors should reassess whether they can afford to take these risks in their portfolios.
The future of both exchanges’ staking programs is also unclear, as the SEC linked the unregistered offering and sale of securities to staking. Earlier this year, crypto exchange Kraken agreed to end its staking program in the U.S. as part of a settlement with the SEC.