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Cryptocurrency and regulation are two topics that often go hand in hand. Recently, the U.S. Securities and Exchange Commission (SEC) has been in the news for legal actions against big players in the crypto world — Binance and Coinbase. This article will explore these events and the overall relationship between cryptocurrency and its regulators.
My name is Daria Morgen. Since 2014, I’ve been working in the crypto industry, and I’m passionate about the mass adoption of crypto. The topic of crypto regulation is important to me, although I think that its future is still uncertain. My hope is that the industry will maintain its unique identity despite regulatory changes.
The Coinbase & Binance Lawsuits
Before we go any further, let’s introduce the key players involved in this news.
What is Binance?
Binance is a global cryptocurrency exchange and blockchain platform that provides users with an opportunity to trade an incredibly wide variety of cryptocurrencies. Since its launch in 2017, the Binance exchange has rapidly become one of the largest crypto platforms in the world based on trading volume.
What is Coinbase?
Coinbase, founded in 2012, is a leading digital currency exchange that offers a secure platform for buying, selling, and storing cryptocurrencies like Bitcoin. With a strong focus on ease of use and security, it has become a trusted gateway to the crypto world for individuals and institutions alike.
What is SEC?
The U.S. Securities and Exchange Commission (SEC) is a government agency that oversees and regulates the securities industry in the United States. It enforces transparency and fairness, ensuring that businesses adhere to laws designed to protect investors and maintain fair, orderly, and efficient markets.
What happened? Why did the SEC sue Binance and Coinbase?
The U.S. Securities and Exchange Commission (SEC) has recently initiated legal proceedings against Binance and its CEO, Changpeng Zhao, based on multiple accusations. A key allegation is that Binance covertly transferred billions of dollars of customer funds among companies under Zhao’s control. The SEC also asserts that despite Zhao’s denials of involvement and claims that Binance.US is an independent trading platform, he secretly managed the exchange.
Binance faces a total of 13 civil charges, including the operation of unregistered securities, as suggested by a 2018 text from the then-chief compliance officer. Binance has denied all of the accusations.
Similarly, the SEC has also filed a lawsuit against Coinbase, another major crypto exchange. The agency alleges that Coinbase, with $130 billion in assets, has been operating unregistered securities. The particular concern lies around its staking-as-a-service program.
According to the SEC, Coinbase has been disregarding regulatory structures and avoiding the mandated disclosure requirements, thus affecting the national securities markets and investors’ protection. Coinbase has countered these claims, arguing that the SEC’s focus on enforcement in the absence of clear rules for the digital asset industry harms America’s economic competitiveness, emphasizing their commitment to compliance.
Although Coinbase’s share price and the price of BNB, Binance’s flagship token, as well as the other crypto assets associated with the lawsuits like SOL, have gone down after the news, the rest of the crypto market seems to have taken the lawsuits in stride. The values of key cryptocurrencies not involved in the news, such as Bitcoin or Ethereum, haven’t been affected that greatly, and there were no immediate “booms” in the market.
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This is a good sign: there will undoubtedly be more conflicts with regulators in the future, and the crypto market needs to be resilient. Binance dominates crypto trading, so the market surviving the SEC complaint and lawsuits against the company is certainly great news.
Crypto Regulation: A Complicated History
This is not the first time the crypto industry has been hit by regulations, nor will it be the last. Let’s take a look at the history of the complex relationship between crypto and various regulators in the United States.
2009: Bitcoin Emerges
The world of finance was forever changed when Bitcoin, the first decentralized cryptocurrency, was created. This was the birth of a dynamic and complex technology that would test traditional financial regulations.
2013: Guidance from FinCEN
In response to the rise of Bitcoin, the Financial Crimes Enforcement Network (FinCEN) issued guidance indicating that certain participants in the cryptocurrency space would be considered “money transmitters” under federal law, imposing regulatory responsibilities on them.
2015: Commodity Futures Trading Commission (CFTC) Steps In
In a pivotal move, the CFTC declared Bitcoin to be a commodity, thereby asserting its jurisdiction over future virtual currency derivatives.
2017: SEC Focuses on ICOs
As Initial Coin Offerings (ICOs) surged, the SEC issued a landmark report determining that tokens issued in the DAO ICO were securities. This brought ICOs under the purview of federal securities laws and resulted in many enforcement actions.
2019: Legal Clarity on Bitcoin and Ether
The SEC confirmed that Bitcoin and Ether were not securities due to their decentralized nature. This recognition paved the way for independent trading platforms to flourish, provided they adhered to other relevant regulations.
2020: First Enforcement Action Against a Crypto Exchange
The SEC took its first enforcement action against a crypto exchange. The platform vigorously disputed the SEC’s allegations but ultimately settled.
2021: SEC Chair Gary Gensler Takes Office
Gary Gensler, known for his expertise in cryptocurrencies, took office as the SEC Chair. His tenure has seen crypto assets and platforms under increased regulatory scrutiny.
2022: SEC’s Investigations Continue
Regulatory scrutiny increased with allegations that crypto exchanges were operating as unregistered securities and inadequately protecting user assets. This resulted in several enforcement actions and lawsuits from the SEC. During this time, the SEC has also accused the famous Sam Bankman-Fried, the CEO and co-founder of the FTX crypto exchange, of organizing a “massive, years-long fraud.”
2023: Regulatory Actions Intensify
In 2023, we are seeing an increase in the SEC’s actions and attention towards the crypto industry, highlighted by the Binance and Coinbase lawsuits.
This timeline doesn’t include everything that happened in the past decade or so — but it shows the relentless attention that US regulators have paid to crypto platforms and digital assets. And that’s just the US — let’s see a brief overview of what has been happening in the crypto industry in the rest of the world, too.
Crypto Regulation Around the World
The approach to regulating cryptocurrency and independent trading platforms around the globe differs greatly depending on a specific country and government. Some have embraced the potential of digital currencies, while others have enforced strict regulations or outright bans.
For instance, Japan has positioned itself as a leader in cryptocurrency regulation, having implemented a legal system for digital currencies back in 2017. It allows crypto exchanges to operate as long as they are registered and adhere to regulations aimed at protecting users. On the other hand, China has taken a stern approach, outright banning all crypto-related activities, including trading and mining in 2021, due to concerns over financial risk.
Switzerland, one of the countries that has been relatively open to crypto.
Meanwhile, countries like Switzerland and Malta have eagerly embraced cryptocurrencies. Switzerland has established a ‘Crypto Valley’ in the canton of Zug, where blockchain startups flourish under a well-defined regulatory framework. Malta, known as the ‘Blockchain Island,’ has implemented crypto-friendly laws to attract businesses in the field. These examples illustrate the varied state of crypto regulation worldwide, reflecting the ongoing global debate about how to deal with this new and rapidly evolving technology.
What Is the Future for Crypto Regulation?
The recent legal actions by the U.S. Securities and Exchange Commission (SEC) against Binance and Coinbase have sent shock waves throughout the decentralized finance (DeFi) world. As a key branch of the crypto industry, DeFi holds the potential to revolutionize traditional financial systems by providing decentralized financial services. These hopes, however, have been somewhat disturbed by the recent allegations against these prominent crypto exchanges.
The suspicion that Binance entities engaged in the misuse of investor funds and the allegations of operating unregistered exchanges are serious. They cast a shadow over the future of DeFi and independent trading platforms. These charges also suggest that regulators are exerting their influence over an industry traditionally characterized by independence and autonomy.
On the other hand, this could signify a crucial turning point, a necessary ‘growing pain’ for the crypto world. Increased scrutiny might lead to more robust and transparent systems, thus bolstering trust among users and traditional institutions. Trading platforms could also be driven to adopt better compliance measures, ensuring they stand up to regulatory standards. As such, the current turbulence might be an essential phase in the broader acceptance and integration of cryptocurrencies into mainstream finance globally.
However, the opposite could also occur. Too much regulatory scrutiny might stifle innovation and push investors away from the U.S. and towards other countries with more favorable crypto regulations. Only time will reveal the true impact of these legal actions on the future of crypto in the U.S. and globally.
FAQ
Why is the SEC suing Binance?
The SEC took legal action against Binance, helmed by founder Changpeng Zhao, on a series of allegations. These included 13 charges asserting that Binance and related entities had inappropriate control and engaged in the misuse of customer assets, allowing these to be intermingled and diverted, including to Sigma Chain, a Zhao-controlled entity. Another significant accusation included in the lawsuit is that BAM Trading and BAM Management US Holdings provided misleading information to investors, insinuating non-existent trading controls over the Binance.US platform.
It was alleged that manipulative trading was used to artificially increase the platform’s trading volume. The SEC complaint also presents evidence suggesting that Binance’s leadership was aware they were potentially breaching U.S. regulations. Notably, a message from the Binance chief compliance officer to a colleague, which was included as evidence in the lawsuit, indicated awareness of these regulatory violations, stating, “We are operating as a f**king unlicensed securities exchange in the USA bro.”
Who is behind Bitcoin?
No one knows for sure who is behind Bitcoin, the biggest cryptocurrency. It is attributed to a person — or a group of people — under the name of Satoshi Nakamoto.
Is Binance going to stop operations?
It is unlikely that Binance — the largest cryptocurrency exchange in the world — will stop operations over the SEC lawsuit. The company has reassured its users that all assets on Binance and Binance affiliate platforms, including Binance.US, have never been at risk and that they are currently safe and secure. At the time of writing, Binance was committed to becoming subject to any SEC enforcement action.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.
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