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In 2023, the U.S. Securities and Exchange Commission (SEC) sued the world’s three largest crypto exchanges – Binance, Coinbase and Kraken – to mark the start of a new era for the unrestrained crypto industry.
How are the companies faring? Which cryptocurrencies were identified as securities? What does this mean for the crypto industry?
In this article, we take a deep dive into the lawsuits, as well as analyze the market response and the potential future of the industry.
SEC vs. Binance: Accused of Using Customer Fund
On June 5, 2023, the U.S. SEC filed a lawsuit against Binance for:
- Running an unregistered exchange and allowing US investors to buy, sell, and trade cryptos;
- Selling Binance-owned cryptos BNB and BUSD stablecoin;
- Offering staking and profit-generating programs called BNB Vault and Simple Earn;
- Misrepresenting how investor protection controls are implemented at the Binance.US platform;
- Not allowing Binance.US to operate independently;
- Concealing efforts to ensure high-value US investors continue trading on its main Binance.com platform, despite claiming that the company did not allow US citizens to use Binance.com;
- Using customer’s crypto and fiat assets;
- Engaging in wash trading that artificially inflated the trading volume on the Binance.US platform.
When comparing the SEC’s allegations made against Binance and Coinbase, the charges against the former look more serious. Accusations that Binance commingled customer’s funds for its own interest are similar to those made against now-fallen U.S. crypto exchange FTX and its sister hedge fund Alameda Research.
What is going on with Binance vs SEC?
As of late-November 2023, the US SEC’s lawsuit against Binance has not been resolved.
A Wall Street Journal (WSJ) report suggested that the SEC is looking for evidence that Binance and its founder Changpeng Zhao (CZ) may have had a “backdoor” to control assets on the Binance.US platform. The report said that the SEC is investigating whether Binance used US customer funds in the same way as Sam Bankman-Fried did at the FTX exchange.
Among the many complaints in SEC’s lawsuit, accusations of Binance not allowing its US-based unit to operate independently and controlling US operations “behind the scenes” remains a key subject of the lawsuit.
CZ and Binance have responded by filing a motion to dismiss the US SEC lawsuit.
The SEC vs Binance lawsuit is expected to extend well into 2024. The crypto exchange will go into the new year $4.3 billion short after agreeing to pay one of the largest fines in corporate history to settle charges made by the US Department of Justice (DoJ), Commodity Futures Trading Commission (CFTC) and Financial Crimes Enforcement Network (FinCEN) in November 2023.
The settlement saw CZ step down from his CEO role at Binance. Company insider Richard Teng was appointed as the new CEO who now faces an adamant US SEC looking to clampdown the US crypto industry.
A press release from the U.S. Department of the Treasury confirmed that the settlement with Binance will “ensure Binance’s complete exit from the United States.”
SEC vs Kraken: Complaints of ‘Commingling’ Filed
On 20 November 2023, the US SEC filed a complaint against Kraken, the world’s third-largest crypto exchange by trade volume.
The SEC’s charges against Kraken were similar to those against Binance and Coinbase – operating as an “an unregistered securities exchange, broker, dealer, and clearing agency.”
The SEC alleged that Kraken commingled its customer’s funds for payment of operating expenses, despite an auditor identifying it as “a significant risk of loss” to its customers.
Kraken responded by denying the charges and declaring its intention to defend itself in court.
This is not the first time the SEC has filed a lawsuit against Kraken. In February 2023, Kraken agreed to cease its crypto staking services and pay $30 million in fines to settle charges against its staking program.
READ MORE: Techopedia’s Coverage of SEC vs Kraken
SEC vs. Coinbase: “Compliant” Exchange Accused of Non-Compliance
A day after Binance’s lawsuit, the SEC charged Coinbase with “operating as an unregistered securities exchange, broker, and clearing agency.”
Authorities also took to issue Coinbase’s staking-as-a-service program and marketing campaigns that positioned itself as a compliant exchange. The SEC said:
According to the Howey Test, an “investment contract” exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
What Is Going On With Coinbase vs. SEC?
- In response to the lawsuit, Coinbase said that the company had agreed to register “some portion of our business” with the regulator. However, its effort was to no avail due to a lack of cooperation from the SEC.
- The exchange also added that it asked to specifically identify which cryptos on its platforms the SEC believed to be securities, but it declined to do so.
- On 5 August, Coinbase asked a U.S. court to dismiss the U.S. SEC’s lawsuit, which accused the company of violating U.S. securities laws.
- Media reports revealed that the SEC had asked Coinbase to halt trading of all cryptos except bitcoin before suing the company in June 2023.
- Just like the SEC vs Binance case, SEC vs Coinbase is expected to extend well into 2024.
Crypto Market Reactions to SEC vs. Exchanges
The cryptocurrency market held up pretty well despite the SEC vs. Binance and Coinbase headlines. Top coins bitcoin (BTC) and ether (ETH), rebounded quickly from initial sell-offs.
Note that the SEC did not mention BTC and ETH as securities in its lawsuits. However, cryptos like BNB, ADA, SOL, MATIC, and ATOM saw selling pressure after being named “investment contracts.”
Below is a list of cryptos identified as securities by the SEC:
| Binance vs. SEC lawsuit | Coinbase vs. SEC lawsuit |
| Solana (SOL) | Solana (SOL) |
| Cardano (ADA) | Cardano (ADA) |
| Polygon (MATIC) | Polygon (MATIC) |
| Filecoin (FIL) | Filecoin (FIL) |
| Cosmos (ATOM) | – |
| Sandbox (SAND) | Sandbox (SAND) |
| Decentraland (MANA) | – |
| Algorand (ALGO) | – |
| Axie Infinity (AXS) | Axie Infinity (AXS) |
| Coti (COTI) | – |
| – | Chilliz (CHZ) |
| – | Flow (FLOW) |
| – | Internet Computer (ICP) |
| – | Near (NEAR) |
| – | Voyager (VGX) |
| – | Dash (DASH) |
| – | Nexo (NEXO) |
Data firm Nansen reported that users on Binance withdrew over $3 billion within 24 hours of the SEC lawsuit.
A similar withdrawal frenzy ensued in November 2023 as investors withdrew more than $1 billion worth of funds from Binance following its $4.3 billion fine.
Meanwhile, in the equity market, Coinbase stock closed 12% lower on June 6 following the SEC lawsuit. Coinbase stock has recovered and has posted year-to-date gains of over 250%, as of 27 November 2023.
What Next for the Crypto Industry?
- Compliant CEX as a crypto on-ramp
In a report from April 2023, cryptocurrency experts at Pantera Capital had envisioned a crypto industry where U.S. crypto companies move offshore as the regulators get more aggressive. Pantera Capital said that a time may come when U.S. centralized exchanges only list Bitcoin and Ether while international exchanges list tokens that cannot trade in the U.S.
Paul Veradittakit, Chia Jeng Yang, and Matt Stephenson of Pantera Capital, said:
“If you are a U.S. CEX, it makes sense to stop offering non-Bitcoin or Ethereum swaps on your platform and launch it through a decentralized exchange (DEX) instead.
“This is essentially Coinbase and the release of its BASE product. Coinbase users can now interact with DeFi in a way that creates less risk for Coinbase.”
- CFTC over SEC
The crypto industry is reluctantly coming to terms with the inevitability of regulations. There is a clear preference within the industry for cryptocurrencies to be regulated by the US commodities regulator CFTC, and not by the US securities regulator SEC.
Crypto insiders are lobbying for cryptocurrencies to be classified as commodities and not securities. This would allow crypto brokers, dealers, and exchanges to operate without the strict disclosure compliances that companies dealing in securities are subjected to.
In the aftermath of the SEC lawsuits against Binance and Coinbase, CFTC chair Rostin Behnam told the House Agriculture Committee that it would take one to two years to implement cryptocurrency regulations. Chair Benham noted that “there is confusion” with the ongoing crypto regulatory action.
As reported by Blackworks, Behnam suggested that “there is a regulatory vacuum… [and] a gap in regulation over digital commodity assets.”
Understanding the SEC’s Concerns
The SEC wants to regulate cryptocurrencies and subject crypto companies, brokers, dealers, and exchanges the same way it does the stock market and its participants. However, as cryptocurrencies have only gained prominence in recent years, there are no regulations designed specifically for them.
The SEC looks hell-bent on treating cryptocurrencies like securities. In 2023, the SEC started legal proceedings against the three largest crypto exchanges in the world – Binance, Coinbase and Kraken – for operating as unregistered exchanges.
The Bottom Line: Crypto Regulations Are Inevitable
Cryptocurrency regulation is inevitable. There is a silver lining that all of the action is happening in the U.S. Unlike China, where an abrupt and blanket ban on crypto activity was implemented in 2021, there is the belief that the crypto industry might have a chance of getting a fair deal in the U.S.
With better clarity on regulations, crypto exchanges are expected to emerge stronger, safer, and more acceptable than ever.
What Is the U.S. SEC?
The U.S. SEC was established in 1934 after the stock market crash of 1929. In the 1920s, the U.S. economy was thriving, leading to a surge in the number of investors and stock prices. However, there were few regulations in place during that time. Many companies engaged in dishonest practices by providing false and deceptive information to the public. As the economy began to slow down towards the end of the decade, the stock market experienced a significant decline in October 1929. This event ultimately caused the Great Depression, a prolonged and severe economic downturn that lasted throughout the 1930s.
To prevent such an event and restore public confidence in the stock market, the US Congress created the SEC. The regulator makes sure that listed companies provide truthful information about their businesses and inform investors about the risk involved in dealing with their stocks. The SEC also regulates brokers, dealers, and exchanges operating within the industry.
What Is Binance?
Binance is the world’s largest crypto exchange boasting average daily trade volumes of about $65 billion. The company was founded by Changpeng Zhao, also known as CZ. Binance has its own cryptocurrency called BNB, one of the most valuable in the world in terms of market cap. The BNB token is used on Binance’s blockchain network called the BNB Chain.
The company operates as Binance.US in the U.S.
What Is Coinbase?
Coinbase is one of the most well-known crypto companies in the world. Founded in 2012 by Brian Armstong, Coinbase has gone on to become a household name across 100 countries in the world. Coinbase is the largest crypto exchange by trade volume in the US. Unlike Binance, Coinbase does not have its own token.
In 2023, the company announced that it will be launching a blockchain network called Base in collaboration with Ethereum layer-two network Optimism.
What Is Kraken?
Kraken is one of the oldest crypto exchanges in the world. The cryptocurrency exchange headquartered in San Francisco, was co-founded in 2011 by Jesse Powell and Thanh Luu. Available in over 190 countries, Kraken offers its more than 10 million customers the ability to buy, sell, and hold over 200 different cryptocurrencies. The platform supports transactions in 8 different fiat currencies and can be accessed through both the Kraken mobile app and its website.
