This month of June 2023 will undoubtedly go down in history as one of the most horrible for the cryptocurrency industry.
In quick succession, the US Securities and Exchange Commission launched legal proceedings in the space of 24 hours against two of the most important platforms in the sector.
The powerful regulator on June 5 filed a complaint against Binance, the largest cryptocurrency exchange in the world. The next day, the SEC sued Coinbase, the most popular platform for buying and selling digital currencies.
If the time and the simultaneity of the two complaints gives the impression that they are the same offensive by the regulator to bring the young financial services industry powered by the blockchain to heel, the two cases are quite distinct.
One is more serious (Binance) than the other as it involves criminal charges. Here are the main lines and the differences between what Binance and Coinbase are accused of and what the two firms risk.
Binance
The allegations: The platform engages in a "web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law," the SEC alleges.
It accuses the firm of mishandling client funds and lying to regulators, in an effort to circumvent US laws, putting client funds at risk.
Wall Street top regulator also alleges that Binance mixed the funds of its customers with its own and secretly sent them to an entity separate from the company controlled by its founder, Changpeng Zhao. The entity in question, which is called Merit Peak Ltd., allegedly received more than $20 billion, including customer funds.
Zhao and Binance "commingle customer assets or divert customer assets as they please," the SEC says.
Basically, Binance and its CEO and co-founder allegedly committed fraud.
The Response: Binance says the complaint is a ploy by the SEC to generate buzz and publicity. The platform says the SEC broke off negotiations that could have led to a deal.
"We intend to defend our platform vigorously," the company assured.
It's important to observe that Binance is not licensed in the U.S. The platform, however, has a subsidiary, Binance.US, which caters to investors living on American soil.
What does the SEC Want?
The Wall Street regulator is asking the court to side with it that Binance doesn't have a license to operate in the US. This will result into an injunction that would make it hard for Binance to do business in the US, where the firm is currently offering its trading services.
The SEC is also seeking unspecified fines against the platform. In the meantime, the regulator is seeking a temporary restraining order to freeze Binance US assets and repatriate some foreign assets in the US.
"Clarification: this could only affects http://Binance.US, IF granted by the court," Binance's CEO said on Twitter. "It does NOT affect http://Binance.com. Funds are #SAFU."
Safu stands for secure asset fund for users, which is an emergency insurance fund announced on July 2018 by Binance to protect users who experienced hacks or security breaches.
Coinbase
The allegations: The SEC alleges that the platform, which is the one the few public crypto exchange, is operating illegally, because, since 2019 it has been "an unregistered national securities exchange, broker, and clearing agency."
Basically, Coinbase (COIN) offers services that it shouldn't and that it doesn't license.
The response: The firm has officially welcomed the complaint because, it says, this will finally allow for clear regulation, which it and other crypto firms have been asking for for a long time.
"If we need to avail ourselves of the courts to get clarity, so be it," responded Brian Armstrong, CEO and co-founder of Coinbase.
What Is at Stake?
The quarrel appears technical but it has huge repercussions: Are a cryptocurrencies securities? And what about the staking service?
A security is, according to the SEC, "an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The regulator references a Supreme Court judgment of 1946, the Howey Test, that sets what an "investment contract" is and therefore would be subject to US securities laws. An investment contract exists if money is invested with expectations of profits.
As a result, any cryptocurrency except bitcoin is a security, according to the SEC.
The regulator also seems to place staking in this category. Staking is a way in which investors lock up – or stake – their crypto tokens with a blockchain validator. The goal is to be rewarded with new coins when their staked crypto tokens become part of the process for validating data on the blockchain.
The fall in cryptocurrency prices last year and the resulting drop in trading volumes caused many crypto exchanges to rely more and more on staking services as a source of revenue.
Coinbase should have obtained a license before offering all these products, summarizes the SEC. By choosing not to be registered, the platform has outlawed itself.
What Does the SEC Want?
The regulator seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief.
What are the differences between Binance and Coinbase?
Coinbase is not being sued for fraud. The SEC is not alleging misappropriation of customer funds against the platform. It's not accused of operating a hedge fund or a firm that trades against its customers.
Changpeng Zhao, the CEO and co-founder of Binance, is also personally charged. This is not the case with Brian Armstrong, the CEO of Coinbase.
Zhao may face criminal charges but he lives in the United Arab Emirates, according to the US Commodity Future Trading Commission (CFTC). The UAE doesn't have an extradition treaty with the US. which makes it unlikely that the crypto king could be arrested, like his former Sam Bankman-Fried, CEO of bankrupt crypto exchange FTX.
Are Binance and Coinbase Facing Other Legal Troubles?
The complaint against the SEC is the only publicly known legal action against Coinbase.
On the other hand, Binance is already the subject of investigation from two other powerful US regulators.
In March, the CFTC filed a lawsuit against Zhao and Binance for allegedly letting US residents buy and sell crypto derivatives while the firm is not registered. The federal agency is seeking to ban Zhao from doing business under its jurisdiction for life and banish Binance from the US.
The Department of Justice (DoJ) is investigating the firm at the same time. The federal prosecutors are reportedly considering filing money-laundering charges against Binance and some of its executives, including Zhao.
