June proved to be a momentous month for the cryptocurrency industry, but not in a good way.
With Sam Bankman-Fried’s fall from grace and his subsequent criminal indictment, the industry needed good news.
After all, the founder and (supposed) crypto-golden boy of FTX Trading Ltd. had been working with Congress and regulators to establish a regulatory framework for cryptocurrencies—before Bankman-Fried’s own house of cards came crashing down.
But the industry didn’t get its good news. Instead, it got new lawsuits filed by the Securities and Exchange Commission against Coinbase and Binance, two of the top cryptocurrency exchanges. (The SEC included various other related entities and individuals as defendants in these lawsuits too).
The allegations in each civil suit are slightly different, but both claim that Binance and Coinbase offered and merged “three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies”—without registering with the SEC.
SEC Chairman Gary Gensler contemporaneously said: “We don’t need more digital currency. We already have digital currency. It’s called the U.S. dollar. It’s called [the] euro. It’s called the yen. They’re all digital right now.”
Gensler, pejoratively referred to as Goldman Gary by some in the crypto industry, went on to say:
These trading platforms, they call themselves exchanges, [but they] are commingling a number of functions. … In traditional finance, we don’t see the New York Stock Exchange also operating a hedge fund making markets [essentially commingling two different roles in the securities markets].
The SEC alleges that Coinbase (including related entities and individuals) violated various provisions of both the Securities Act of 1933 and the Securities Exchange Act of 1934.
The SEC’s lawsuit is “exclusively focused on what is or is not a security,” Coinbase co-founder and CEO Brian Armstrong said in a tweet. “And we are confident in our facts and the law.”
After all, if securities aren’t being traded on Coinbase’s platforms, they don’t have to register with the Securities and Exchange Commission. Coinbase says that none of the cryptocurrencies on its platforms qualifies as securities, but, of course, the SEC disagrees and says many, if not most, do qualify.
The SEC alleges that Binance (including related entities and individuals) also violated various provisions of these statutes. But the agency also made more serious and comparatively salacious allegations against Binance.
Reuters reported that the SEC accused Binance of “inflating trading volumes, mishandling customer funds and lying about its operations.”
Binance initially didn’t respond substantively to the lawsuit, simply saying it had “actively cooperated with the SEC’s investigations” and was “disheartened by [the SEC’s] choice” to litigate. Still, Binance did contest and win some limited relief against the SEC’s efforts to freeze its funds.
But these aren’t the only lawsuits and other legal wrangling these companies face from U.S. regulators.
In March, the Commodity Futures Trading Commission, another U.S. financial regulator, filed its own civil lawsuit against Binance (and related entities and individuals), alleging violations of various statutes. The CFTC is seen by some in the crypto industry as being more friendly to it than the SEC is.
And Coinbase’s dispute with the SEC has been brewing for some time. In March, the agency issued a Wells notice, essentially a warning before enforcement actions, to Coinbase about its being in violation of securities regulations and laws.
Coinbase responded in a blog post and official filing with the SEC, arguing that it had violated no rules because it didn’t platform or trade securities. Coinbase also asked the agency to establish clear rules for regulating crypto, something that it had formally asked the SEC to do in July 2022.
Coinbase also took the extraordinary step of filing a petition for writ of mandamus with the U.S. Court of Appeals for the 3rd Circuit, essentially asking the court to force the SEC to respond to the company’s request for rulemaking.
Because the SEC indicated to the court that its “staff expects to submit its final recommendation to the commission on Coinbase’s petition for rulemaking within 120 days,” the court retained jurisdiction over the case but postponed issuing a ruling until at least Oct.11.
All of this also is taking place against the House of Representatives’ consideration of various proposals to bring clarity to the regulation of cryptocurrency.
Clarity certainly is needed. Until then, Coinbase, Binance, and others in the industry are likely to face continued litigation and enforcement actions.
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