Earlier this week, the regulator sued Binance, which operates the world’s largest crypto asset trading platform in the world, and its founder, alleging multiple securities law violations. Just hours later, the SEC filed charges against Crypto exchange Coinbase for what it says amounts to operating an unregistered securities exchange and brokerage. The central issue in the regulatory actions is whether or not the exchanges are simple currency exchanges or if they are really exchanging and trading securities and must be registered as brokers under federal securities laws.
The Case Against Binance
The SEC complaint filed in U.S. District Court for the District of Columbia against Binance and its founder, Changpeng Zhao, alleges multiple securities law violations. Specifically, in its complaint, the SEC alleged, “since at least July 2017, Binance.com and Binance.US, while controlled by Zhao, operated as exchanges, brokers, dealers, and clearing agencies, earning “at least $11.6 billion in revenue from, among other things, transaction fees from U.S. customers.”
The SEC’s complaint alleges, “with respect to Binance.com, Binance should have registered as an exchange, broker-dealer, and clearing agency. With respect to Binance.US, Binance and BAM Trading should have registered as an exchange and as clearing agencies; and BAM Trading should have registered as a broker-dealer. The SEC also alleges that Zhao is liable as a control person for Binance’s and BAM Trading’s respective registration violations.”
The SEC’s complaint further alleges Zhao and Binance created BAM Management and BAM Trading in September 2019 as part of an elaborate scheme to evade U.S. federal securities laws by claiming that BAM Trading operated the Binance.US platform independently and that U.S. customers were restricted from using the Binance.com platform. In reality, “Zhao and Binance maintained substantial involvement and control of the U.S. entity and that, behind the scenes, Zhao directed Binance to allow and conceal many high-value U.S. customers’ continued access to Binance.com,” the SEC alleges.
The SEC also accuses Zhao and Binance of commingling customer assets or diverting customer assets “as they please, including to an entity Zhao owned and controlled, called Sigma Chain.” Moreover, BAM Trading and BAM Management “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,” the SEC said.
Binance and Zhao allegedly also “concealed the fact that it was commingling billions of dollars of investor assets” and sending them Merit Peak Limited, a third party also owned by Zhao.
The SEC complaint also charges violations of critical registration-related provisions of federal securities laws:
- Binance and BAM Trading with operating unregistered national securities exchanges, broker-dealers, and clearing agencies;
- Binance and BAM Trading with the unregistered offer and sale of Binance’s own crypto assets, including a so-called exchange token, BNB, a so-called stablecoin, Binance USD (BUSD), certain crypto-lending products, and a staking-as-a-service program; and
- Zhao as a control person for Binance’s and BAM Trading’s operation of unregistered national securities exchanges, broker-dealers, and clearing agencies.
“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,” 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.”
Sham Controls?
“They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms,” Gensler added. “The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.”
SEC Enforcement Division Director Gurbir Grewal said, “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 maximize 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.”
Grewal added, “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.
Among other remedies, the SEC is seeking emergency relief. On June 6, the Commission filed an emergency action seeking a temporary restraining order freezing assets, “directing defendants to repatriate assets held for the benefit of customers of the Binance.US crypto trading platform,” and seeking other emergency relief against Binance Holdings, BAM Trading Services, BAM Management US Holdings, and Zhao, “to ensure that Binance.US customers’ assets are protected and remain in the United States through the resolution of the SEC’s pending litigation of this matter.”
Binance Responds
In a blog post, Binance expressed disappointment with the SEC’s choice to file a complaint. “From the start, we have actively cooperated with the SEC’s investigations and have worked hard to answer their questions and address their concerns,” Binance wrote.
“While we take the SEC’s allegations seriously, they should not be the subject of an SEC enforcement action, let alone on an emergency basis. We intend to defend our platform vigorously. Unfortunately, the SEC’s refusal to productively engage with us is just another example of the Commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry.”
Binance said the SEC’s action is “another in a line of examples where, as with other crypto projects facing similar suits, the Commission has determined to regulate with the blunt weapons of enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology.”
Binance said it will continue to cooperate with U.S. and non-U.S. regulators and policymakers. “Because Binance is not a U.S. exchange, the SEC’s actions are limited in reach. Still, we stand with digital asset market participants in the United States in opposition to the SEC’s latest overreach, and we are prepared to fight it to the full extent of the law. We will work alongside industry partners to defend this important technology from misguided lawsuits. And we will maintain our unceasing efforts to deliver a safe and trusted platform for our users that holds true to our core value of furthering the freedom of money.”
Coinbase Action
On the same day it sought emergency action against Binance, the SEC also filed a complaint against Coinbase. That complaint, filed in U.S. District Court for the Southern District of New York, charges Coinbase “with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for “failing to register the offer and sale of its crypto asset staking-as-a-service program.”
According to the SEC’s complaint, since at least 2019, Coinbase “made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities” and “intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law.”
Through these unregistered services, the SEC alleges Coinbase:
- Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
- Engages 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.
As alleged in the SEC’s complaint, Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, record-keeping requirements, and safeguards against conflicts of interest, among others. The SEC’s complaint also alleges that Coinbase’s holding company, Coinbase Global, is a control person of Coinbase and is, thus, also liable for certain of Coinbase’s violations.
The SEC’s complaint seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief. 
Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.