Blockchain & Cryptocurrency , Cryptocurrency Fraud , Fraud Management & Cybercrime

US SEC Sues Binance and Coinbase Over Securities Violations

Lawsuits Are Latest Washington Regulatory Salvo Against Cryptocurrency
US SEC Sues Binance and Coinbase Over Securities Violations
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The Biden administration stepped up regulatory enforcement against cryptocurrency trading platforms this week in consecutive lawsuits targeting Binance and Coinbase for alleged violations of securities laws.

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The Securities and Exchange Commission said the companies operated simultaneously as unregistered securities exchanges, brokers and clearing agencies.

A 13-count complaint against Binance, founder Changpeng Zhao and affiliate BAM Trading Services further accuses the world's largest crypto trading platform of market manipulation, including through two secret trading firms used to give the illusion of trading activity. Zhao also allegedly commingled billions of dollars of customer funds with one of the funds, Merit Peak, while seeking to evade U.S. regulatory oversight. "We are operating as a fking unlicensed securities exchange in the USA bro," a Binance compliance executive admitted in 2018, the complaint states.

This is the second active federal lawsuit Binance faces. The Commodity Futures Trading Commission in March sued Binance companies, Zhao and a former chief compliance officer for circumventing compliance controls, such as by instructing U.S. customers on how to evade them.

The agency's complaint against Coinbase lacks salacious details but is significant for its assertion that cryptocurrency platforms have conflicts of interest by simultaneously hosting a market and executing trading orders and intermediating trades.

The lawsuits are the latest in a string of federal bids at policing the cryptocurrency sector, including a federal prosecution against former cryptocurrency wunderkind Sam Bankman-Fried following the November collapse of trading exchange FTX. The Department of Treasury is sanctioning platforms used to evade money laundering controls.

"We don't need more digital currency," SEC Chairman Gary Gensler said Tuesday during an interview on CNBC. "We already have digital currency. It's called the U.S. dollar. It's called the euro. It's called the yen. They're all digital right now," Gensler said.

The agency on Tuesday afternoon filed an emergency motion requesting a federal judge freeze the assets of Binance-affiliated company BAM Management and the repatriation of assets held by Binance for U.S. customers.

There are "striking resemblances" between FTX and Binance, including the commingling of billions of dollars of customer funds, the transfer of billions of dollars of customer funds to third parties controlled by a CEO and the misleading of customers in relation to trading controls and corporate governance, said Syedur Rahman, partner at London-based law firm Rahman Ravelli, specializing in cryptocurrency fraud and white-collar crime.

While the SEC lawsuit against Binance appears to be damning for the crypto sphere in general, it is promising from a long-term perspective, he told Information Security Media Group. "Poor practices as alleged by the SEC in these instances will likely lead to business failures and collapse, as with FTX. But if these cases mean that compliance is taken more seriously in the future, this could be positive for crypto's long-term future," he said.

The Case Against Coinbase

Coinbase, the largest crypto asset trading platform in the world, allegedly has made billions of dollars by peddling unregistered securities since 2019, the SEC said Tuesday. It also offered and sold its crypto asset staking-as-a-service program without registering it as a security. Crypto exchange Kraken in February agreed to stop offering staking investments to the U.S. and paid a $30 million fine.

The SEC seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties and other equitable relief.

Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors," the complaint states.

Coinbase co-founder and CEO Brian Armstrong said the company had attempted to register with the SEC. In a March blog post published after the SEC notified the company of a potential enforcement action, the company said it had worked with regulators to find a path forward. "The SEC asked us to provide our views on what a registration path for Coinbase could look like - because there is no existing way for a crypto exchange to register," wrote Chief Legal Officer Paul Grewal.

One reason the agency didn't approve the registration, a former senior SEC attorney told New York Magazine, is that cryptocurrency trading platforms' business models aren't permissible. "One of the great lessons from the Great Depression is: You can't have a single entity performing as all the entities in the capital markets," said Tyler Gellasch.

Binance

The SEC said Binance misrepresented trading controls and the amount of oversight the company and Zhao had on a trading platform for U.S. customers that putatively had tighter controls.

It allegedly allowed high-value customers in the country to transact on Binance.com, despite the company's public claims that Binance US offered a smaller array of services and functioned separately from its parent entity.

"[W]e ask them to onboard with US, and then if their volume is really very big … we will push hard on .com side to accept it on an exceptional basis … we always have a way for whales," a company compliance executive said in an internal communication in July 2020, according to the complaint.

The controls it did have were applied loosely, the SEC said, adding two multimillion-dollar transfers into one of the secret trading firms, dubbed Sigma Chain, used by Binance to prop up trading volume. One transfer was for $145 million and the other for $45 million. Sigma Chain spent $11 million from the account that received the funds to purchase a yacht.

Binance was "disheartened" by the agency's complaint, it said.

The lawsuit is "just another example of the Commission's misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry," the company said, adding that the commission will have to grapple with the fact that "Binance is not a U.S. exchange."


About the Author

Rashmi Ramesh

Rashmi Ramesh

Assistant Editor, Global News Desk, ISMG

Ramesh has seven years of experience writing and editing stories on finance, enterprise and consumer technology, and diversity and inclusion. She has previously worked at formerly News Corp-owned TechCircle, business daily The Economic Times and The New Indian Express.




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