Leading cryptocurrency exchanges Coinbase and Binance are no strangers to controversy, as they tower over the battered crypto sector.
Coinbase leadership was recently accused of insider-trading $1 billion of company stock, according to Bloomberg News, on top of the company's previous receipt of an SEC "Wells Notice" for potential securities law violations, as reported by Forbes.
Binance's lengthy string of eyebrow-raising episodes, catalogued by Axios, include a market manipulation warning from the NY attorney general and a leaked document allegedly detailing an elaborate plan to deceive regulators.
Despite all the smoke, U.S. authorities have been slow or hesitant to respond. That hesitance ended this week, when the SEC cracked down hard on the two crypto giants for varying, alleged violations of U.S. securities law.
SEC hits Coinbase, Binance on multiple fronts
On Tuesday morning, the SEC charged Coinbase with several violations of securities law, in a complaint alleging the company made billions of dollars since at least 2019 illegally handling crypto "asset securities" transactions.
The charges include:
- Operating an unregistered securities exchange, broker or clearing agency, which skirts federally-mandated investor protections including record keeping requirements, SEC inspections and conflict of interest rules.
- Failing to register the offer and sale of it separate staking-as-a-service program, which allegedly commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions that are required to be kept separate.
On Monday morning, the SEC charged Binance with a more extensive list of 13 securities law violations. The affected entities include Binance Holdings Ltd., its U.S.-based affiliate BAM Trading Services Inc., and their founder and CEO, Changpeng Zhao.
The charges include:
- Acting as an unregistered exchange, broker, and clearing agency while earning $11.6 billion in revenue that included fees from U.S.-based Binance users.
- Unregistered offer and sale of crypto tokens including BNB and BUSD, crypto-lending products “Simple Earn” and “BNB Vault,” and Binance.US’ staking-as-a-service program, through which the company maintains secret control of user funds.
- Failure to restrict U.S. users from accessing Binance.com, by facilitating and concealing the exchange activity of wealthy U.S. crypto investors.
- Misleading exchange users and company investors about the strength of surveillance and controls to stop token price manipulation on the Binance.US platform, while secretly engaging in "wash trading" to pump trading volumes.
Coinbase and Binance defend their operations
Following the SEC's Tuesday announcement, Coinbase chief legal officer Paul Grewal remarked "it's disappointing but not surprising that the SEC has decided to bring legal action against Coinbase today," according to Yahoo Finance.
Meanwhile, Coinbase CEO Brian Armstrong hit back on Twitter, writing, "Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules...Instead of publishing a clear rulebook, the SEC has taken a regulation by enforcement approach that is hurting America. So if we need to avail ourselves of the courts to get clarity, so be it."
Binance responded to its own charges in a company blog post just after the SEC's
announcement on Monday. The company stated, "From the start, we have actively cooperated... Recently, we engaged in extensive good-faith discussions to reach a negotiated settlement." It also noted, "We are disappointed" in the SEC's actions to "act unilaterally and litigate."
Binance pledged to defend itself and criticized the SEC as "misguided" in its "refusal to provide much-needed clarity and guidance to the digital asset industry." The company then went further, contending, "The SEC’s actions undermine America’s role as a global hub for financial innovation and leadership."
The company ultimately promised to continue cooperating with regulators around the globe "because that is the right thing to do."
"The SEC has taken a regulation by enforcement approach that is hurting America...if we need to avail ourselves of the courts to get clarity, so be it."
Brian Armstrong, Coinbase CEO
Bottom line for crypto firms and customers
Both Binance and Coinbase are experiencing a hugely consequential reckoning with federal regulators. Axios reports depositors have withdrawn hundreds of millions of dollars worth of cryptocurrencies from both exchanges since 9 a.m. Monday.
Still, despite the threat of regulatory crackdowns, Axios also reports that very few crypto firms have registered with the SEC as securities brokers. Crypto industry leaders have often stated their intention to disrupt or even supplant the global financial system, so it's natural they would attempt to play by their own set of rules.
However, it's also unclear what benefits these exchanges get from registering, as federal agencies take longer and longer to promulgate concrete regulations covering the crypto space. The chief counsel of Ripple, a crypto firm locked in a lengthy battle with the SEC, told Blockworks that his advice for emerging crypto companies is, "Don’t launch [crypto projects] in the U.S...It's not a level playing field."
"Don’t launch [crypto projects] in the U.S...It's not a level playing field."
Stuart Alderoty, Ripple CLO
This episode is a reminder for individual investors that the cryptocurrency industry is still the Wild West, where even the biggest global players allegedly ignore the few concrete rules that govern the sector. And there's no easy way for crypto owners to get back their assets if they get scammed or a major exchange goes bust, unlike customers of the heavily regulated, FDIC-backed U.S. banking system.
Here are a few ways to protect your crypto assets:
- Don't keep your crypto on an exchange unless you plan to actively trade it. Major and minor crypto exchanges stretching from FTX back to Mt. Gox have proven themselves unusually prone to hacks and corporate mismanagement.
- Keep your crypto in your own physical “cold wallet” offline. Hardware wallets that look similar to USB drives, such as Ledger and Trezor, can store multiple cryptocurrencies and cut your risk of losing your funds.
- Carefully guard your “seed phrase,” a series of words that give a user access to all currency and data held in a crypto wallet, including funds and private keys.
- When making a transaction, double-check that you’re sending it to the right wallet.
- Use a Virtual Private Network to shield your payment data when making transactions.
