SEC on the Offensive, but Binance and Coinbase Are Not the Same

Just one day after the Security and Exchange Commission (SEC) made it known that it was suing the world’s largest crypto exchange Binance, along with its CEO Changpeng Zhao, the regulation agency then went on to sue the largest crypto exchange in the US, Coinbase.

The case being presented against Binance and its CEO details thirteen offenses, including that they “subverted their own controls to secretly allow high-value US customers to continue trading.” Regarding Binance's US trading arms, it's contended that they were offering unregistered securities, that their separation from the main business was essentially just a front, and that they were “operated as a fraud or deceit.” There are other claims that customer deposits were mismanaged, and it was stated that Changpeng Zhao operates a “web of deception.”

Against Coinbase, the allegation is that the platform has acted as an “unregistered broker, exchange and clearing agency.”

Binance and Coinbase are hugely influential, and the implicit statement of intent being made by the SEC seems clear: yes, it’s coming for crypto, and no, it isn’t interested in a debate about whether or not new frameworks are required in order to integrate crypto with mainstream finance.

In fact, such sentiment is not just implied, it’s been articulated directly by SEC's Chair Gary Gensler, who in an interview with CNBC stated,

“We don’t need more digital currency, we already have digital currency, it’s called the US dollar, it’s called the Euro, it’s called the Yen: they’re all digital right now. We already have digital investments … it’s all digital right now, the investing world”.

These are not the words of a commission chief interested in exploring what differentiates decentralized public blockchains from central bank-administered fiat currencies; this is a message that reads one way only: according to the SEC, existing institutions, and the regulations that protect them, are the only game in town.

What’s more, in an unfolding development, the SEC has filed a motion to freeze crypto assets held by Binance US, leading some observers to wonder how freezing investor assets can be synonymous with offering investor protection.

Problems with the SEC's Position

By going on the offensive against Binance and Coinbase simultaneously, the SEC may have left an impression that both exchanges have operated in a similar manner. It’s also notable that Binance, which is at the end of significantly more egregious allegations, led the news and has set the overall tone.

However, looking at each case, it’s apparent that Binance is being accused of acting in a seriously dishonest manner, with terms such as 'fraud', 'deceit' and 'deception' being employed by the SEC. In contrast, Coinbase can put forward the case that their issues are technical and relate simply to reasonable disagreements about regulation, and Coinbase's CEO Brian Armstrong has in fact stated: “the complaint filed against us is exclusively focused on what is or is not a security.”

Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules.

Remember:
1. The SEC reviewed our business and allowed us to become a public company in 2021.
2. There is no path to "come in and…

— Brian Armstrong 🛡️ (@brian_armstrong) June 6, 2023

Furthermore, the SEC has listed tokens that it labels as securities, including major cryptocurrencies such as those from Cardano, Solana and Polygon, but it hasn’t sued the issuers of those tokens. It seems incongruous to take action against an exchange dealing in an alleged unregistered security but not against the issuer of that asset, and the SEC’s lists are without judicial authority.

However, this doesn’t mean that there aren’t knock-on effects anyway, as evidenced when Dan Gallagher, the Chief Legal Compliance Officer of popular trading app Robinhood (and a former SEC employee), stated with reference to the possibility of delisting crypto tokens named by the SEC that: “We are actively reviewing the SEC analysis to determine what, if any, actions to take in that regard.”

Are Exchanges Waiting on a Political Solution?

The SEC appears to be speeding up its operation against crypto, and this comes just as pro-crypto political action is being initiated in the form of a draft bill (The Digital Asset Market Structure Discussion Draft) from the House Committee on Financial Services and the House Committee on Agriculture, with the proposed legislation focused on bringing in a new framework of crypto regulation.

With current events in mind, a political solution, as represented by the new draft bill. may yet be the most effective solution for the US crypto industry, but, at the same time, politics is a slow process. What’s more, the bill was created by two Republicans (Patrick McHenry and Glenn Thompson), while Democrats have yet to respond.

This last point is a pronounced issue in the US, where the crypto question appears to be breaking along political lines at a moment in which political polarization is markedly intense.

Broadly, it would appear that the Republican camp is more sympathetic to crypto, and there’s a distinct possibility that the road to next year’s presidential elections may serve only to entrench division around this topic.

When discussing the debt ceiling last month, President Biden directly referenced crypto traders in a thoroughly negative context (stating “I’m not going to agree to a deal that protects wealthy tax cheats and crypto traders.”) Previously, his fellow Democrat Elizabeth Warren had declared her intention to raise an “anti-crypto army.”

However, the Republican presidential contender, Ron DeSantis prohibited CBDCs (which are seen as antithetical to Bitcoin and crypto) in the state of Florida, and in Texas, also a red state, lawmakers voted to add the right to hold digital currencies to the state's Bill of Rights.

All in all, if crypto platforms in the US are relying on politics to safeguard the crypto industry, then they may run up against entirely new sets of problems stemming from the rancorously partisan nature of the political arena.