Takeaways
- SEC filed lawsuits against leading cryptocurrency exchanges.
- The number of cases, both civil and criminal, are increasing.
- It’s getting difficult for exchanges to operate in US.
In a one-two punch this week, the Securities and Exchange Commission has filed separate lawsuits against two of the leading cryptocurrency exchanges, Coinbase and Binance.
SEC Acts to "Protect Integrity" of Financial Markets
In one of the lawsuits filed this week, the SEC alleged that Coinbase is running an illegal exchange by letting users trade numerous crypto tokens that are actually unregistered securities. Founded in 2012, Coinbase is the largest cryptocurrency exchange in operating in the United States. It serves as a marketplace for more than 150 different tokens. The SEC’s lawsuit is a significant turn of events as Coinbase is a publicly traded company. On news of the lawsuit, Coinbase’s stock price initially tumbled almost 20%, shaving about $1.5 billion off the company’s market capitalization in the process, before clawing back some of those losses.
In the other lawsuit, the SEC got personal. They not only alleged that Binance had mishandled customer funds, misled investors and regulators, and broke securities rules, they also named the company’s founder and CEO, Changpeng Zhao, in the suit. Founded in 2017, Binance is currently recognized as the largest cryptocurrency exchange in the world by trading volume. It’s a privately held company that doesn’t identify any fixed location as its headquarters. Their platform offers over 350 tokens for trade to some of its global users, although it’s limited to about 150 tokens in the United States. On news of the lawsuit, customers withdrew about $790 million in funds from the platform.
After these lawsuits were filed, SEC Chair Gary Gensler was interviewed on both Bloomberg Television and CNBC. In those interviews, he suggested that the SEC was clamping down on crypto to not only protect investors, but also to protect the integrity of US financial markets. He opined that the entire business model for the cryptocurrency industry is built on non-compliance with SEC regulations. To elaborate, he alleged that crypto exchanges routinely commingle numerous functions that would never be considered acceptable in traditional finance.
Ongoing SEC Cases Suggest a Pattern
These lawsuits may be unique due to the prominence of Coinbase and Binance, as well as the rapid-fire timing with which they were filed, but these companies are not the only ones in the cryptocurrency industry that the SEC has recently targeted. So far this year, at least four other cryptocurrency exchanges have been charged with failing to comply with securities laws. There’s definitely a pattern at work here.
Of course, all of this follows the collapse of FTX late last year. Similar to Binance and Coinbase, FTX was one of the largest cryptocurrency exchanges. After some questionable business practices came to light in November of 2022, customers attempted to withdraw funds from their accounts en masse, quickly resulting in a liquidity crisis that exposed an $8 billion gap in its accounts. Allegedly, customer funds weren’t available for withdrawal as they had been moved to an affiliated company. Within a week, FTX had declared bankruptcy. A couple of months later, in January of 2023, the company’s co-founder and CEO, Sam Bankman-Fried, was arrested on federal charges of wire fraud, securities fraud, and money laundering. His trial is scheduled for October of 2023.
The Future of Crypto Is at Risk
In short, things are likely about to get much more difficult for the cryptocurrency industry to operate in the United States and perhaps even more difficult for Americans to trade. If the SEC wins either of the lawsuits against Coinbase and Binance, it would establish their jurisdiction over the industry. From that point on, tokens would be considered securities and cryptocurrency exchanges would essentially become the equivalent of the stock market. Even if the SEC doesn’t win, the tide has shifted.
In a joint statement issued earlier this year by the Federal Reserve, the FDIC, and the OCC – in other words, the most powerful regulatory agencies in the banking industry – they warned banks of growing volatility and vulnerabilities associated with cryptocurrencies. While stopping short of prohibiting banks from providing banking services to companies with concentrated exposure to the cryptocurrency industry, it’s clear from the joint statement that the government is keeping a close eye on those banks that chose to do so. There’s a lot more motivation now to regulate than ever before. With so much focus coming to bear on cryptocurrency exchanges, don’t let yourself get caught in the crossfire.
