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US cracks down on crypto with lawsuits against coinbase, Binance

Tan KW
Publish date: Thu, 08 Jun 2023, 08:05 AM
Tan KW
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NEW YORK: The top US securities regulator is suing cryptocurrency platform coinbase, the second lawsuit against a major crypto exchange, in an 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 (SEC) took aim at Binance, the world’s largest cryptocurrency exchange, on Monday. The SEC accuses Binance and its chief executive officer 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.

“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,” said Kevin O’Brien, a partner at Ford O’Brien Landy and a former federal prosecutor. He added that the SEC has not previously taken on such major crypto players.

“If the SEC prevails in either case, the cryptocurrency industry will be transformed.”

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.

Coinbase suffered about US$1.28bil in net customer outflows following the lawsuit, according to initial estimates from data firm Nansen.

Paul Grewal, coinbase’s general counsel, said that the company will continue operating as usual and has “demonstrated commitment to compliance”.

Oanda senior market analyst Ed Moya said the SEC “looks like it’s playing Whac-A-Mole with crypto exchanges,” and because most exchanges offer a range of tokens that operate on blockchain protocols targeted by regulators, “it seems like this is just the beginning”.

The leading cryptocurrency, bitcoin, has been a paradoxical beneficiary of the crackdown.

After an initial plunge to a nearly three-month low of US$25,350 following the Binance suit, bitcoin rebounded by more than US$2,000 , exceeding the previous day’s high.

“The SEC is making life nearly impossible for several altcoins, and that is actually driving some crypto traders back into bitcoin,” explained Oanda’s Moya.

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.

SEC chairman Gary Gensler has long said tokens constitute securities and initially focused on the sale of tokens and interest-bearing crypto products.

More recently, it has taken aim at unregistered crypto broker-dealers, exchange trading, and clearing activity.

While a few crypto companies are licenced 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 sued Beaxy Digital and Bittrex Global this year for failing to register as an exchange, clearing house and broker.

“The whole business model is built on noncompliance with the US securities laws, and we’re asking them to come into compliance,” Gensler told CNBC.

Crypto companies refute that tokens meet the definition of a security and said the SEC’s rules are ambiguous and that the SEC is 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.

Kristin Smith, chief executive officer of the Blockchain Association trade group, rejected Gensler’s efforts to oversee the industry.

“We’re confident the courts will prove Gensler wrong in due time,” she said.

Founded in 2012, coinbase recently served more than 108 million customers and ended March with US$130bil of customer crypto assets and funds on its balance sheet.

 - Reuters

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