The SEC has sued Binance and Coinbase for operating unregistered securities exchanges and offering unregistered securities, including their staking programs. Coinbase also faces 10 companion state cases relating only to its staking program for retail users.
The two SEC actions differ in fundamental ways: the SEC alleges that Binance and its founder engaged in fraud, manipulative trading, and self-dealing, whereas the Coinbase allegations are limited to technical securities violations; there are no allegations of fraud or other wrongdoing with Coinbase. Coinbase Trust Company, LLC, its regulated custodial entity, was not named in the SEC suit or any of the state actions.
Neither action is a surprise. The SEC has been investigating both exchanges for some time. Both will take years to resolve. In the meantime, both exchanges continue to operate. Coinbase also continues to operate its regulated custodial entity, Coinbase Trust Company, LLC.
Like the SEC suits that have come before these, they have limited impact on the broader crypto ecosystem. These lawsuits will take years to resolve in court. During that period, crypto developers will continue to build and innovate in the US and around the world.
Binance and Coinbase Lawsuits & Timing
On June 5 and 6, the SEC sued the two largest global crypto exchanges: first Binance, then Coinbase. In coordination with the SEC’s action, 10 states also sued Coinbase alleging violations relating only to Coinbase’s retail staking product.
These lawsuits come directly on the heels of a Digital Asset Market Structure Proposal by US Representatives McHenry and Thompson on June 2, and amidst constructive Congressional engagement on crypto, with hearings by the House Agriculture, Energy & Commerce, and Financial Services Committees that include discussions of that Proposal. (Our summary of the joint draft Proposal is available here.)
What do the SEC lawsuits allege?
Both suits allege that Binance and Coinbase violated US securities laws by: (1) operating an unregistered securities exchange; (2) selling unregistered crypto asset securities, including staking; and (3) misleading investors about their risks and internal controls.
Both suits also allege that 17 digital assets that Binance and Coinbase trade are unregistered securities, overlapping on 6 of the 17. All 17 digital assets are on proof of stake blockchains.
The Binance complaint includes additional allegations that Binance, its co-founder and CEO, and two related entities committed fraud, tried to avoid US regulatory oversight, permitted manipulative trading, and engaged in self-dealing. The SEC sought a temporary restraining order to freeze all assets tied to Binance’s US entity, but the court has not granted it.
What impact will the lawsuits have on Binance’s and Coinbase’s operations?
Binance and Coinbase have both stated that they will vigorously defend their companies, and continue to operate as usual.
Coinbase will likely see little business disruption. It is noteworthy that Coinbase’s regulated custodial entity, Coinbase Trust Company, LLC, is not named in the SEC’s action or any of the companion state actions. We do not anticipate disruptions to its custodial or trading services. Coinbase may choose to change or pause its Earn product, which provides staking rewards to retail customers, because it is the only issue in the 10 state actions.
Binance will likely have to suspend US operations if the Court agrees to freeze Binance.US assets, and could lose access to US banking services.
What impact could these lawsuits have on crypto more broadly?
Like the SEC suits that have come before these, they have limited impact on the broader crypto ecosystem. SEC Chairman Gensler has claimed that most digital assets are unregistered securities. Since he has been Chair, the SEC has stopped collaborating with industry participants who seek guidance on how to comply with federal securities law. Instead, the SEC has brought enforcement actions, including against other exchanges alleging the same violations.
It is unsurprising that the SEC sued Binance and Coinbase. Both exchanges’ tussles with the SEC have been well-publicized. More remarkable is that the SEC’s allegations are relatively limited in scope; the Coinbase allegations are only technical violations, there are no allegations of fraud or other wrongdoing.
These lawsuits will take years to resolve in court. During that period, crypto developers will continue to build and innovate. It is possible that US federal law clarifying crypto’s regulatory status will be passed while these suits are pending. It is certain that other countries around the world will implement crypto regulatory frameworks over the same period. The EU, Hong Kong, Singapore, UAE, and UK are all vying to attract developers and become crypto hubs.
What happens to token holders if the tokens named in the complaints are ruled securities?
The 17 tokens listed in these two suits are among nearly 100 tokens that the SEC has labeled as unregistered, non-exempt securities in enforcement actions against a party other than the token’s issuer. It is impossible to predict how a judge will rule on any of those tokens, and, if any of these are deemed to be securities, how the Court or the SEC would address all of the tokens currently in circulation, or what the impact to token holders would be, especially because the tokens may be trading lawfully in other jurisdictions.
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