This week has seen US regulators crack down hard on crypto firms they feel are flouting US securities rules. On Monday, the US Securities and Exchange Commission (SEC) filed 13 charges against the world’s largest crypto exchange, Binance, and its founder, Changpeng Zhao.
“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. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
“fking unlicensed”
The SEC claims Binance was well aware it was contravening US regulations and set up subsidiaries BAM Management and BAM Trading in September 2019 as “part of an elaborate scheme to evade US federal securities laws,” claiming that the subsidiaries were operated outside the US and not open to US consumers.
“In reality, Zhao and Binance maintained substantial involvement and control of the US entity,” says the SEC’s complaint. “Behind the scenes, Zhao directed Binance to allow and conceal many high-value US customers’ continued access to Binance.com. In one instance, the Binance chief compliance officer messaged a colleague that, ‘[w]e are operating as a fking unlicensed securities exchange in the USA bro.’”
Coinbase charged for unregistered operations
The SEC also announced on Tuesday it is suing crypto platform Coinbase for operating an unregistered crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. It has also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.
Potential legal issues have been looming over Coinbase ever since it started publicly trading shares in the US more than two years ago. At the time, the firm said there was a “high degree of uncertainty” surrounding the legality of its operations and warned that regulators might disagree with the firm that it felt their rules were not applicable.
Back in March, when Coinbase was first notified by the SEC of the potential legal action, the company published a blog entitled: We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead.
In the blog, Coinbase’s chief legal officer, Paul Grewal wrote: “We welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”
“The rest of the world is not waiting”
In another blog, published the day before the SEC’s charges were publicly announced, Grewal argued that US crypto regulation threatened to damage the US economy, putting it far behind other economies with more forward-thinking regulatory approaches to crypto. He said: “Distributed ledger and digital asset technology is, as the White House has stated, critical and foundational. Despite being identified as potentially critical to US economic and national security, the US is pushing the technology and the innovators overseas due to lack of clear rules and regulations for crypto.”
“The rest of the world is not waiting for us, and they are taking advantage of our absence,” added Grewal. “The European Union, the UK, Australia, Singapore and China – through Hong Kong – just to name a few, are putting in place regulatory frameworks that are creating room for innovation while also protecting consumers.”
Binance made a similar argument in a blog post published in response to the SEC’s charges: “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,” it says.
“The SEC’s actions undermine America’s role as a global hub for financial innovation and leadership. Digital asset laws remain largely undeveloped in much of the world, and regulation by enforcement is not the best path forward. An effective regulatory framework demands collaborative, transparent, and thoughtful policy engagement – a path the SEC has abandoned.”
