Cryptocurrency Crackdown

US securities regulator sued cryptocurrency platform Coinbase yesterday, the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of a crackdown on the industry and one that could dramatically transform a market that has largely operated outside regulation.

The US Securities and Exchange Commission on Monday took aim at Binance, the world’s largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of operating a “web of deception”.

If successful, the lawsuits could transform the crypto market by successfully asserting the SEC’s jurisdiction over the industry which for years has argued that tokens do not constitute securities and should not be regulated by the SEC.

Crackdown Campaign - The two cases are different, but overlap and point in the same direction: the SEC’s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of the federal securities laws. The SEC has not previously taken on such major crypto players.

In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

US$1.28 Billion At Stake - Coinbase suffered about US$1.28 billion (RM5.89 billion) of net customer outflows following the lawsuit, according to initial estimates from data firm Nansen. Shares of Coinbase’s parent Coinbase Global Inc closed down US$7.10, or 12.1 per cent, at US$51.61 after earlier falling as much as 20.9 per cent. They are up 46 per cent this year.

Broker, Exchange Crackdown - Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined a definition of the term “security,” yet many experts rely on two US Supreme Court cases to determine if an investment product constitutes a security.

Tokens constitute securities and has steadily asserted its authority over the crypto market, focusing initially on the sale of tokens and interest-bearing crypto products. More recently, it has taken aim at unregistered crypto broker dealer, exchange trading and clearing activity.

While a few crypto companies are licensed as alternative system trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform operates as a full-blown stock exchange. The SEC also this year sued Beaxy Digital and Bittrex Global for failing to register as an exchange, clearing house and broker.

The whole business model is built on a noncompliance with the US securities laws and we’re asking them to come into compliance. Crypto companies refute that tokens meet the definition of a security, say the SEC’s rules are ambiguous, and that it’s overstepping its authority in trying to regulate them. Still, many companies have boosted compliance, shelved products and expanded outside the country in response to the crackdown.

Yesterday’s SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. On Monday, the SEC accused Binance of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform, and misleading customers about its controls.

Binance pledged to vigorously defend itself against the lawsuit, which it said reflected the SEC’s “misguided and conscious refusal” to provide clarity to the crypto industry. Customers pulled around US$790 million from Binance and its US affiliate following the lawsuit.