SEC vs crypto: Why the US government is going after Binance and Coinbase
Ng Wei Kai
US REGULATORS kicked off the week by slapping Coinbase and Binance with a host of charges, claiming that the companies have operated illegal exchanges and mishandled customer funds.
This could be one of the biggest blows yet to the crypto industry, which was worth trillions before the recent downturn.
The Business Times explains what the US Securities and Exchange Commission (SEC) is claiming, and why it is going after the two crypto giants after years of relative inaction.
What are the charges?
On Monday (Jun 5), the SEC dropped 13 charges on Binance and its chief executive Changpeng Zhao for allegedly operating a “web of deception”.
Also known as CZ, Zhao is a Canadian citizen, born and raised in China till age 12. The billionaire founder of the cryptocurrency exchange is one of the industry’s highest-profile moguls.
The SEC has alleged that Binance artificially inflated its trading volumes and diverted customer funds, failed to restrict US customers from its platform and misled investors about its market-surveillance controls.
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The SEC has also claimed that Binance and Zhao secretly controlled customers’ assets by allowing them to commingle, and diverting investor funds “as they (pleased)”.
The next day, the SEC filed charges against Coinbase, the largest crypto trading platform in the US, claiming that the company had broken the law by not registering as a broker.
The SEC said Coinbase’s failure to register with it has deprived investors of significant protections, including inspection by the SEC, record-keeping requirements, and safeguards against conflicts of interest and others.
National University of Singapore law professor Kelvin Low noted that the charges brought against Binance are far more severe than those brought against Coinbase.
He pointed out that the SEC was not even the first to act. The Commodity Futures Trading Commission (CFTC) brought its own charges against the company in March.
“And I don’t expect the SEC to be the last. Criminal charges against Binance by the Department of Justice have long been anticipated,” he told BT. (Both the SEC and CFTC charges are civil ones.)
Why is the SEC doing this? And why now?
Charging the crypto exchanges may be a move by the SEC to clarify the regulatory grey area in which cryptocurrencies have existed for years.
Cryptocurrencies have, until now, resisted legal definition, with some regarding them as securities like stocks and bonds, and others regarding them as commodities like gold. A third argument is that they should exist somewhere in between, in an asset class of their own.
This matters because securities and commodities are two very different financial instruments; in the US, they are regulated by different government organisations.
A legal determination that a cryptocurrency is either a security or a commodity has wide-ranging implications about how it can be sold, where it can be listed and who might be able to sue if an issuer makes a mistake.
The move by the SEC is consistent with its long-held view that most crypto products are no different from stocks, bonds and other securities.
That means firms like Binance and Coinbase, which operate as exchanges and provide a platform for trading and selling crypto products, must be registered like any exchange or brokerage that facilitates stock or bond trading.
This also follows the widely high-profile collapse of cryptocurrency exchange FTX in 2022, which resulted in billions in losses to individual investors and institutions, including Singapore’s own Temasek.
How have the crypto exchanges responded?
Binance accused the SEC of regulating the industry with “the blunt weapons of enforcement and litigation”. It said the complex technology developed by it and its peers needed a more nuanced approach.
“Perhaps most surprising, 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,” Binance said in a statement.
Coinbase’s general counsel Paul Grewal said the company will continue its usual operations and has “demonstrated commitment to compliance”.
What does this mean for Singapore and Singaporeans?
Not much at the moment, unless investors are on their platforms. But the outcome of the lawsuits could pave the way for regulation in other jurisdictions.
Coinbase and Binance maintain a presence in Singapore, but are not licensed by the Monetary Authority of Singapore.
In September 2021, MAS ordered Binance to stop providing payment services in Singapore, and to cease soliciting business from Singapore residents.
The regulator said its review of Binance.com‘s operations found that Binance, the website’s operator, “may be in breach of the Payment Services Act for carrying on the business of providing payment services to, and soliciting such business from Singapore residents without an appropriate licence”.
MAS has previously said that while it supports the growth of a “digital asset ecosystem”, it regards cryptocurrencies as unsuitable for use as money and as highly hazardous for retail investors.
In January 2022, it restricted the marketing and advertising of cryptocurrency services in public areas.
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