Financial news

It is no secret that organisations in the crypto world have often butted heads with regulators; with perhaps the most notable example being Ripple’s ongoing case vs the SEC. However, even bigger names within the crypto industry are now being sued by the SEC. Two crypto juggernauts, Binance and Coinbase, have become the latest organisations to clash heads with the US regulators. 

The organisations had lawsuits filed against them by the SEC within a day of each other. The SEC filed 13 charges against Binance including accusations of misleading investors through insider trading and concealing assets. Notably, Binance and its founder, Changpeng Zhao, have been accused of operating Binance in the US despite the country’s restrictions. The SEC has accused Binance of allowing select, high-profile, US investors to continue using its platform.

Furthermore, Binance.US, the platform created to serve as a crypto exchange with allegedly no ties to Binance, has now been found to be controlled by the global crypto exchange and Zhao.

“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC chair Gary Gensler. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied.

“They attempted to evade US securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value US customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”

Binance is not alone in the firing line

Not even a day after the news broke out about Binance’s lawsuit, the SEC announced it was also going to be suing Coinbase too. The crypto asset trading platform was accused of being an unregistered national securities exchange, broker, and clearing agency. Coinbase was also charged for failing to register the offer and sale of its crypto asset staking-as-a-service program.

Additionally, the SEC accused Coinbase of:

• Providing a marketplace and bringing together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact.
• Engaging in the business of effecting securities transactions for the accounts of Coinbase customers; and
• Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.

The SEC’s complaint, filed in US District Court for the Southern District of New York, alleges that Coinbase and CGI violated certain registration provisions of the Securities Exchange Act of 1934. Furthermore, it suggests Coinbase violated the securities offering registration provisions of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief.

“The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.” – Gary Gensler

What does this mean for the industry?

With the complaints being launched in such close succession, the fintech industry was taken aback by the news. We spoke to experts to understand what they believe these lawsuits mean for the future of the industry.

Crypto innovation could be hurt by overbearing regulations

Gasper Stih, marketing director at zondacrypto, the crypto exchange, analyses the impact the lawsuits will have on each company. Despite Coinbase planning to launch a non-US-based subsidiary abroad, Stih highlights that both Coinbase and Binance have strong businesses within the US. Therefore the lawsuits could have a long-lasting impact. He said: “The lawsuits are evidence of the fact that regulatory pressure on the crypto industry is tightening, along with the SEC’s actions in the US and MiCA approval in the EU.

“The long-term impact of these activities may stretch far beyond the United States, as an increasing number of regulators will want to investigate the crypto-related entities. At the same time, the consumers are also becoming more aware of potential threats that come with using services provided by companies that do not bother to adjust their operations to the regulations.

“As a result, the consumers will become more picky, investing their time and money only in companies which are regulated in their market. All of this should be beneficial for the crypto industry in the long term, as everyone will benefit from a more regulated market, especially the beginner investors. However, at the same time, it’s worth making sure that the regulations reflect the specific nature of our industry rather than just being 1:1 from the financial sector. Otherwise, it may hurt innovation in crypto.”

A wild west no more

The phrases ‘a regulatory grey area’ and ‘a regulatory wild west’ are often synonymous with cryptocurrencies. According to Alex Konanykhin, CEO and founder of Unicoin, an equity-backed cryptocurrency these phrases might be phased out now following the SEC’s actions: “By initiating lawsuits against the largest crypto exchanges, the Securities and Exchange Commission sends a clear message that the crypto ecosystem is not going to remain a wild west and that no company is too large to be above the US securities laws. 

“The increased level of enforcement is expected to accelerate the shift from the first wave of cryptocurrencies to their next generation, which will be regulated, audited, publicly reporting and backed by assets. Our Unicoin is just the first of such currencies. 

“Reasonable regulation is needed to bring transparency and stability to the crypto market, and increase trust in blockchain-based financial innovations.”

Increased expansion outside the US

Blockchain platform, Fireblocks‘ chief legal and compliance officer, Jason Allegrante, discusses the negative impact overregulating cryptocurrencies could have on the US ecosystem: “Until the SEC prevails in court, it is business as usual at exchanges. But the clock has started on a multi-year litigation process.

“The cumulative impact of the SEC’s actions puts pressure on digital asset businesses in the United States. We can expect further expansion of these exchanges into international regions that have more favourable jurisdiction.

“It is up to the Courts and the United States Congress to decide whether the agencies are implicitly addressing a major question, like the viability of an entire industry in the United States, or not.”

An offshore trend

Tim Tully, CEO of Zelcore, the multi-asset wallet, shares a similar sentiment adding: “Regulations are intended to protect consumers. There’s counterparty risk that comes with centralised exchanges – a traditional finance solution to a new technology. And the SEC allegations toward Binance – particularly around market manipulation and misusing customer funds — demonstrate the need to police them. The same IOU methodology as traditional finance should have the regulations to protect the consumer.

“But it’s also important to note that blockchain and Web technology prevents the need for third-party custody. With self-custody, the asset owner has control. The more we see potential situations occur of the type Binance is accused of, along with those of FTX and other bad actors, the more the catalysation toward decentralised self-custody.

“And that’s also why the government needs to be careful not to overregulate. Eventually, all things physical will be made digital and will be stored, accessed, exchanged, and owned on the blockchain by individuals and companies. Innovation must be supported by smart but supportive regulation. If the US is too heavy-handed with regulation, it will push innovation offshore and the country could be left behind.”

Fear of the unknown

Graeme Moore, head of tokenisation, Polymesh, the regulated assets blockchain, further supported the fear that regulations could lead to a move away from the US. He says: “This latest action by the SEC to file charges against Binance and Coinbase is a concerning new phase for the fintech and crypto industries alike. While we do want innovative companies and crypto to fully comply with all US regulatory frameworks and laws, policies remain confusing and opaque.

“There is a great deal of fear of the unknown and this occurs at the precipice of every new technology: electricity, trains, cars, planes, computers, the internet, and now blockchains.

“Eventually, every form of money and security in the world will use blockchains, and we look forward to clear-cut regulatory frameworks on how to deal with these assets. Sadly we’re not there yet in the US, but a regulator suing a massive financial firm, such as Binance, will not affect the inevitable march forward by the digital asset industry to create a better world for everyone (inside and outside the US).”

Short-term suffering for long-term gain

Edan Yago, the founder of Sovryn, believes that the crypto industry will survive despite the SEC’s decision to sue Binance and that the adoption of DeFi technology will only increase. He says: “In the short term, targeting these leading providers is likely to have a chilling effect. However, this will likely last far shorter and be less impactful than most expect. Crypto is an industry that is used to adversity.

“The longer run impact is likely to be threefold: a further decentralisation of providers, with leaders losing dominance to smaller, more distributed players; a flight to the safety of Bitcoin and possibly Ethereum; and a further boost to decentralised financial (DeFi) products. This represents just another in a long line of steps towards greater decentralisation.”

Crises bring opportunities 

Crypto exchange, Bitget’s managing director, Gracy Chen, is cautiously optimistic about the future of crypto. She says: “We approach the current regulatory issues with caution and seriousness, but crises also bring opportunities. This market is always full of changes: despite the stricter regulations on the cryptocurrency industry in the United States, it is not completely exclusionary.

“At the same time, the potential for innovation and social value in the crypto industry is recognised. Favourable policies are continuously being implemented in places like Hong Kong, Dubai, Singapore, and new opportunities are emerging. Before every bull market, there is always a process of reshuffling, with some market makers and capital exiting while new funds enter.

“Once the crisis subsides, regulatory measures are gradually implemented, and the cryptocurrency infrastructure becomes more complete, the market will have greater room for imagination. In a market with low sentiment, it is not easy for individual retail investors to earn substantial profits through trading. However, with Bitget’s Copy Trading, users can follow experienced traders and achieve profitability.”

• Francis Bignell

  Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.