SEC Goes After Crypto Giants

The US Securities and Exchange Commission (SEC) has ramped up its aggressive stance towards crypto market participants, by filing charges against both Binance and Coinbase – Binance’s founder and CEO Changpeng Zhao, is also facing charges.

In its filing against Binance and Zhao, the SEC alleges while Zhao and Binance publicly claimed that US customers were restricted from transacting on Binance.com, in reality they subverted their own controls to secretly allow high-value US customers to continue trading on the platform.

Further, the SEC alleges that, while Zhao and Binance publicly claimed that Binance.US was created as a separate, independent trading platform for US investors, Zhao and Binance secretly controlled the platform’s operations behind the scenes. It also says Zhao and Binance exercised control of the platforms’ customers’ assets, permitting them to co-mingle or divert assets as they pleased, including to an entity Zhao owned and controlled called Sigma Chain.

The SEC’s complaint further alleges that BAM Trading and BAM Management US Holdings, misled investors about non-existent trading controls over the Binance.US platform, while Sigma Chain engaged in manipulative trading that artificially inflated the platform’s trading volume. Further, the Complaint alleges that the defendants concealed the fact that it was co-mingling billions of dollars of investor assets and sending them to a third party, Merit Peak Limited, that is also owned by Zhao.

“Through 13 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,” says 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.”

Gurbir Grewal, director of the SEC’s Division of Enforcement, adds, “We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk – all in an effort to maximise their own profits. By engaging in multiple unregistered offerings and also failing to register while at the same time combining the functions of exchanges, brokers, dealers, and clearing agencies, the Binance platforms under Zhao’s control imposed outsized risks and conflicts of interest on investors.

“Those risks and conflicts are only heightened by the Binance platforms’ lack of transparency, reliance on related-party transactions, and lies about controls to prevent manipulative trading,” he adds. “Despite their years-long efforts to not ‘be held accountable,’ today’s complaint begins the process of doing so.”

Coinbase in the Firing Line

Meanwhile, Coinbase has been charged by the SEC with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

The SEC argues that since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities by intertwining the traditional services of an exchange, broker, and clearing agency without having registered any of those functions.

The SEC says Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.

Secondly, the SEC alleges that, since 2019, Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts. Through this staking program, Coinbase allegedly pools each type of customers’ stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool, the SEC argues, adding Coinbase failed to register its offers and sales of this staking programme as required by law.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” says Grewal. “As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”