Inside The Fed’s Regulatory War Against Coinbase And Binance

Most in crypto circles saw the government lawsuits against Coinbase and Binance coming. The feds have been investigating the two crypto exchange platforms for months.

Back in March, the Securities and Exchange Commission, the U.S. government agency that enforces the law against market manipulation, informed Coinbase that it planned to take enforcement action against the company. The move was noted as part of the feds increasing crackdown on digital-currency firms, The Wall Street Journal reported.

The SEC included the regulation of emerging technologies and crypto assets as one of its 2023 priorities. The SEC wants to analyze whether crypto companies meet appropriate standards of care when “making recommendations, referrals or providing investment advice,” Forbes reported.

American-based Coinbase is considered the largest cryptocurrency exchange in the U.S. by trading volume. Founded in 2012 by Brian Armstrong and Fred Ehrsam, the company sued the SEC in April, seeking a federal court to force the regulator to respond to a rulemaking petition the company submitted in 2022 asking it to make clear regulations pertaining to cryptocurrencies.

The SEC sued Coinbase on June 6, alleging that the company was operating as an unregistered exchange and broker and that 13 assets listed on its platform were considered crypto asset securities, CNBC reported.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” SEC chair Gary Gensler said in a statement.

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The suit came of the heels of the SEC initiating its lawsuit against Binance and its founder Changpeng Zhao.

Binance reportedly operates the largest cryptocurrency exchange globally in terms of the daily trading volume of cryptocurrencies. The company was founded in 2017 by Zhao and was initially based in China before moving its headquarters to Tokyo and then Malta.

In 2021, Binance the U.S. Department of Justice and the Internal Revenue Service started to investigate the company on allegations of money laundering and tax offenses.

On June 5, the SEC sued Binance and its billionaire founder Zhao. The agency alleges that the founder and company worked to attract U.S. customers to its unregulated international exchange, commingled investor funds with their own and violated securities laws, CNBC reported.

According to the complaint, between June 2018 and July 2021, Binance earned $11.6 billion in revenue, most of which came from transaction fees. The SEC charges that since Binance’s inception, the exchange has “at first overtly and later furtively” worked to entice U.S. customers at the direction and control of its founder Zhao.

The complaint alleges that Binance created Binance.US as a shield for the main company and Zhao to “reveal, retard, and resolve” law enforcement targets and protect Binance. The complaint also stated that Binance knew thousands of customers were based in the U.S. but elected not to act, despite federal law barring the unregistered offer and sale of securities.

With the announcement of the lawsuits, both companies saw their shares drop, with Coinbase seeing a 20 percent drop.

“These trading platforms, they call themselves exchanges, are commingling a number of functions,” SEC chair Gary Gensler said on CNBC. “We don’t see the New York Stock Exchange operating a hedge fund,” Gensler continued.

Coinbase chief legal officer Paul Grewal responded to the lawsuit with a statement to CNBC. “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Grewal said. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”

In a blog post, Binance responded to the suit by stating, “We are disappointed that the U.S. Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief.” Binance added that it has “actively cooperated with the SEC’s investigations” and “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”

Coinbase CEO Brian Armstrong at TechCrunch Disrupt 2014, Oct. 21, 2014, London, (Anthony Harvey/Getty Images for TechCrunch)
Binance CEO Changpeng Zhao at Web Summit 2022, Lisbon (Piaras Ó Mídheach/Web Summit via Sportsfile)

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