SEC Takes On Coinbase, Binance

The SEC ignited a legal battle with crypto exchanges Coinbase and Binance that could reshape the crypto industry.

Cryptocurrency exchange Coinbase — the largest crypto asset trading platform in the United States — was hit with a lawsuit on Tuesday as part of a broader move by the SEC to rein in the crypto industry with more oversight, regulation, and protection for investors.

The SEC’s lawsuit against Coinbase alleges that the company operated its cryptocurrency trading platform as an unregistered securities exchange, broker, and clearing agency. The independent federal agency also alleges that Coinbase violated rules that required it to register the offer and sale of its crypto asset staking-as-a-service program.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions. In other parts of our securities markets, these functions are separate,” said SEC Chair Gary Gensler in a June 6 news release.

“Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC,” Gensler continued.

As part of the SEC complaint against Coinbase, the agency alleges that holding company Coinbase Global Inc. is also liable for a number of Coinbase’s violations.

“Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in the press release. “While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors.”

The SEC’s charges against Coinbase follow a separate lawsuit filed on June 5 against Binance, the world’s largest crypto exchange, and its founder Changpeng Zhao.

The SEC alleges that Binance operated unregistered exchanges, broker-dealers, and clearing agencies, misrepresented trading controls and oversight on the platform, and participated in the unregistered offer and sale of securities.

Among the evidence cited in the SEC complaint against Binance was a quote from its chief commercial officer, who bluntly admitted that the company was running an illegal crypto exchange.

“We are operating as a fking unlicensed securities exchange in the USA bro,” Binance’s CCO was quoted as saying in December 2018.

Binance pushed back on the SEC lawsuit claiming that any allegations of wrongdoing from the company were false.

“We respectfully disagree with the SEC’s allegations that Binance operated as an unregistered securities exchange or illegally offered and sold securities,” the company said in a statement. “Because of our size and global name recognition, Binance has found itself an easy target caught in the middle of a U.S. regulatory tug-of-war.”

While the SEC’s charges against Coinbase and Binance were filed for separate reasons, the lawsuits relate to a much larger attempt by the agency to regulate the industry, stop fraud, and protect investors.

Coinbase CEO Brian Armstrong took to Twitter to push back on the SEC’s charges, writing that the team at Coinbase was proud to represent the industry in court and looked forward to finally getting clarity around crypto rules.

“Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America,” Armstrong tweeted. “So if we need to avail ourselves of the courts to get clarity, so be it.”

Armstrong said the Coinbase suit differed from others filed by the SEC, like the one against Binance.

“The complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law,” Armstrong said.

Still, Coinbase may have accidentally found itself between a rock and a hard place, according to Mark Palmer, an analyst at Berenberg Capital Markets.

“Coinbase is now facing a situation where it has to defend in court most of its operations and its only alternative is to pivot, which is extremely difficult,” said Palmer, as reported by The Wall Street Journal.

The news that the SEC’s enforcement division had named Coinbase in a lawsuit saw the company’s stock price (NASDAQ: COIN) plummet 20%, dropping from around $58.70 to $46.43 on Tuesday. The stock was trading around $53.40 by midday on Wednesday.