Summary The SEC has sued Binance and Coinbase in the last week. My issue here isn't with regulation but the clumsy way it is implemented. Meanwhile, Hong Kong has laid the groundwork to become Asia's crypto hub. Crypto is a global phenomenon, so I believe it will survive the SEC's attacks. Overview The US Securities and Exchange Commission (SEC), on Monday, June 6, in the US District Court for the District of Columbia, filed 13 charges against Binance Holdings Limited ( BNB-USD ), operators of Binance.com—the world's largest cryptocurrency exchange by trade volume. Binance and some major crypto firms and exchanges have been in the crosshairs of the SEC, as the SEC tries to tighten crypto regulation and make crypto firms and exchanges comply with its somewhat obscure securities laws. The new wave of regulatory attacks has struck panic into the crypto market, with cryptocurrencies falling across the board. Nonetheless, my belief is that, the most the SEC can do is change the landscape in the crypto world, but it will not be able to significantly limit demand, especially when it comes to Bitcoin (BTC-USD). The SEC Attacks Binance CEO Changpeng Zhao (popularly known as CZ) and Binance's US-based affiliate BAM Trading Services Inc. (BAM Trading) were charged alongside Binance. Part of the charges brought forward by the SEC includes allegations of operating unregistered exchanges, broker-dealers, and clearing agencies, and the unregistered offer and sale of crypto assets. while Zhao and Binance publicly claimed that U.S. customers were restricted from transacting on Binance.com, Zhao and Binance in reality subverted their controls to secretly allow high-value U.S. customers to continue trading on the Binance.com platform, Source: SEC Binance launched its US-based trading platform Binance.US in 2019, when it announced its partnership with BAM trading. The SEC has alleged that Binance, CZ, and BAM Trading "engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law." The SEC has also labelled several tokens listed and traded on Binance.US as securities, citing an unlawful solicitation of US investors to buy, sell, and trade crypto asset securities and a conscious evasion of US securities laws. In the charges filed, the SEC also alleged that while CZ and Binance publicly claimed that the Binance.US platform was a separate, autonomous trading platform created for US-based investors and operated by a separate entity, in reality, CZ and Binance controlled Binance.US behind the scenes. Another securities law violation cited by the SEC is the offer and sale of Binance’s crypto assets, which includes its exchange token BNB-USD, its Paxos-issued stablecoin ( BUSD-USD ), some DeFi products, and a staking-as-a-service program. Court documents also listed Solana ( SOL-USD ), Cardano ( ADA-USD ), Polygon ( MATIC-USD ), FileCoin ( FIL-USD ), Cosmos ( ATOM-USD ), Sandbox ( SAND-USD ), Decentraland ( MANA-USD ), Algorand ( ALGO-USD ), Axie Infinity ( AXS-USD ), and COTI ( COTI-USD ) as crypto asset securities, citing that they are offered and sold as investment contracts. The SEC charged Binance for the unregistered offers and sales of BNB, BUSD, and crypto-lending products known as Simple Earn and BNB Vault, Source: SEC press release According to the SEC, Binance failed to restrict US-based investors from accessing Binance.com even though Binance claims that US-based investors can't trade on the platform. CZ has been accused by the SEC of allowing many high-value US-based customers concealed access to Binance.com. The SEC further alleged that CZ and Binance exercise control of customers' assets at Binance.US and these assets are commingled and diverted to other entities, including Sigma Chain—an entity owned and controlled by CZ. These allegations of commingling of users' funds bear similarity with the events that led to the collapse of FTX as users' funds were commingled and used for trade at Sam Bankman-Fried's Alameda research. Similar to Alameda Research's wash trading to prop up trade volume on FTX, the SEC accused CZ-owned Sigma Chain of engaging in manipulative trading to artificially inflate Binance.US' trading volume. Binance's Response Binance has expressed disappointment at the SEC's charges. In a press release , Binance claims it has actively cooperated with the SEC's investigations and worked hard to answer all questions and address all of the SEC's concerns. Binance says it has recently reached a negotiated settlement with the SEC. Binance revealed that despite efforts to cooperate with the SEC and reach a settlement, the SEC abandoned the negotiation process and chose to act unilaterally by filing charges. Binance declared in its statement that the SEC's allegations that users' assets on Binance.US were never at risk or commingled. Today’s action is another in a line of examples where, as with other crypto projects facing similar suits, the Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology, Source: Binance press release Binance has vehemently denied the SEC's allegations and has vowed to defend against any allegations vigorously. Coinbase in the Cross Hairs The SEC's approach to crypto regulation has become a thorn in the side of US-based crypto firms. Barely twenty-four hours after the SEC filed charges against Binance and its CEO, the SEC, in a US District Court for the Southern District of New York filed complaints against Coinbase Global, Inc. ( COIN ). The SEC revealed in a press release that Coinbase has been charged for operating as an unregistered securities exchange, broker, and clearing agency, saying since 2019 Coinbase made billions of dollars unlawfully by facilitating the buying and selling of crypto asset securities. The SEC also alleged that Coinbase violated US securities laws by engaging in an unregistered securities offering through its staking-as-a-service program. Brain Armstrong, Coinbase CEO, in reaction to the SEC's litigation, said that regulators have failed to publish a clear rule book, giving conflicting statements on what a crypto asset should be a security or a commodity. Armstrong said the firm is confident in its facts and the law, hinting at a possibility of facing the SEC at the courts just like Ripple Labs (XRP-USD) has done for over two years. Brad Garlinghouse CEO of Ripple Labs, another major crypto firm that has been in a legal brawl with the SEC for over two years, reacted to the latest events. Garlinghouse, in a tweet , suggested that the SEC is using these charges to divert attention from its involvement in the FTX fiasco. What does this mean for Binance, Coinbase and Crypto? The SEC’s attack on crypto exchanges is nothing new, but it does come at an interesting time, just as Hong Kong has opened the doors to retail investors . This puts the SEC’s actions into perspective. Crypto is a global phenomenon, and the SEC only has control over the US. Sure , this is a big market now, but global crypto adoption should one day dwarf this. Contrary to what most believe, Binance might be in better shape than a company like Coinbase. If the SEC is hell-bent on fighting crypto, then it can probably curtail most of Coinbase’s activities since this is a US-based company. Binance, on the other hand, has a global footprint. Having said this, I don’t expect the US to eliminate crypto completely. Regulation is a necessary evil; my only issue is the clumsy approach the regulatory body has taken. Until this blows over, one can, and probably should anyway, store their crypto in a cold wallet. Takeaway This isn't the first time the SEC will bring charges against a crypto firm; however, the crypto market reacted to the news of the Binance litigation, causing a slight drop in the prices of major cryptocurrencies. To avoid a similar fallout with the SEC, some US-based crypto exchanges, like Robinhood (HOOD) , have hinted at delisting crypto assets labelled as securities in the SEC's litigation against Binance. Ultimately, I believe in buying the fear, and I hold some small positions in BNB and COIN.
