The battle between crypto and the SEC is far from over

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The Securities and Exchange Commission is taking action against Coinbase and Binance, two of the major cryptocurrency exchanges, months after the fall of FTX executive Samuel Bankman-Fried. Pictured: Bankman-Fried leaves federal court in Manhattan on February 9 after his bail hearing. (Photo: Yuki Iwamura/AFP/Getty Images)

June turned out to be a momentous month for the cryptocurrency industry, but not in a good way.

With Sam Bankman-Frieds falling out of favor and his subsequent criminal indictment, the industry needed some good news.

After all, the founder and (supposed) crypto-golden boy of FTX Trading Ltd. had worked with Congress and regulators to establish a regulatory framework for cryptocurrencies before Bankman-Fried’s own house of cards collapsed.

But the industry hasn’t had its good news. Instead, it secured new lawsuits filed by the Securities and Exchange Commission against Coinbase and Binance, two of the major cryptocurrency exchanges. (The SEC has also included various other related entities and individuals as defendants in these lawsuits).

The allegations in each civil lawsuit are slightly different, but both claim that Binance and Coinbase offered and merged three functions that are usually separated in traditional stock markets, namely brokers, exchanges and clearing agencies without registering. with the SEC.

SEC Chairman Gary Gensler said at the same time: We don’t need more digital currency. We already have digital currency. This is called the US dollar. It’s called [the] euro. This is called the yen. They are 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] combine several 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 the Securities Act of 1933 and the Securities Exchange Act of 1934.

The SEC lawsuit is exclusively focused on what is and isn’t security, Coinbase co-founder and CEO Brian Armstrong said in a tweet. And we trust our facts and the law.

After all, if the securities are not traded on Coinbases platforms, they do not have to register with the Securities and Exchange Commission. Coinbase says none of the cryptocurrencies on its platforms are considered securities, but, of course, the SEC disagrees and says many, if not most, are eligible.

The SEC alleges that Binance (including related entities and individuals) also violated various provisions of these articles of association. But the agency also made more serious and relatively 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 did not respond substantially to the lawsuit, saying simply that it actively cooperated with SEC investigations and was discouraged by [the SECs] choice to plead. Still, Binance challenged and got limited relief from the SEC’s efforts to freeze its funds.

But those aren’t the only lawsuits and other legal wrangles these companies face from U.S. regulators.

In March, the Commodity Futures Trading Commission, another US financial regulator, filed its own civil lawsuit against Binance (and related entities and individuals), alleging violations of various laws. The CFTC is considered by some in the crypto industry to be friendlier than the SEC.

And the dispute between Coinbases and the SEC had been brewing for some time. In March, the agency issued a Wells Notice, essentially a pre-enforcement warning, to Coinbase about its violation of securities regulations and laws.

Coinbase responded in a blog post and official SEC filing, arguing that it broke no rules because it didn’t platform or trade securities. Coinbase also asked the agency to establish clear rules to regulate crypto, which it formally asked the SEC to do in July 2022.

Coinbase also took the extraordinary step of filing a writ of mandamus with the United States Court of Appeals for the 3rd Circuit, essentially asking the court to force the SEC to respond to the company’s regulatory request. .

Because the SEC told the court that its staff planned to submit its final recommendation to the commission on Coinbases’ regulatory petition within 120 days, the court retained jurisdiction over the case but postponed a decision until October 11 at least.

All of this is also taking place against the House of Representatives’ consideration of various proposals to clarify cryptocurrency regulation.

Clarity is certainly needed. Until then, Coinbase, Binance and other industry players are likely to face legal action and enforcement action.

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