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In its sharpest crackdown yet on cryptocurrency firms, the Securities and Exchange Commission on Tuesday filed another lawsuit against one large crypto exchange and asked a court to freeze the U.S. assets of another.
The federal regulator’s lawsuit against Coinbase, the biggest U.S.-based cryptocurrency exchange, marked the second blow in back-to-back enforcement actions targeting the industry’s largest and most widely known players. The broadening legal maneuvers strike at the heart of how these firms operate, piercing the regulatory gray area where companies have enjoyed staggering growth and where crypto fortunes were made and lost.
Hours after announcing the Coinbase lawsuit, the SEC asked a federal court to issue a temporary restraining order to freeze assets held by the U.S. arm of Binance, the world’s most popular crypto exchange. That request came the day after the SEC sued Binance, accusing it of violating securities laws and making false statements to investors.
Binance has a U.S. unit that is separate from the rest of its business. But another regulatory agency, the Commodity Futures Trading Commission, earlier this year accused Binance of helping U.S. customers use its offshore site by advising them on the use of virtual private networks. An internal Binance report cited by the CFTC showed 19 percent of the company’s trading revenue in July 2019 came from the United States.
Asked for comment, Binance referred to a post on its official Twitter account.
“User assets remain safe and secure and the platform continues to be fully operational with deposits and withdrawals functioning as normal,” Binance tweeted. “The filing of the preliminary injunction is unwarranted and based more on the SEC Staff obtaining an advantage in litigation versus genuine concern about the safety of customer assets.”
The SEC’s Coinbase lawsuit accuses the company of acting as a securities exchange, broker and clearing agency — entities that have expansive reporting requirements ― since at least 2019. That lawsuit, filed in U.S. District Court for the Southern District of New York, asks for unspecified civil penalties along with the forfeiture of any ill-gotten gains, as well as a permanent injunction from violating SEC rules. Coinbase stock fell more than 12 percent Tuesday.
Binance and Coinbase operate on different ends of the regulatory spectrum, shaping the tandem lawsuits into a powerful message to the industry. Binance claims no physical headquarters or jurisdiction, while Coinbase is publicly traded and incorporated in Delaware.
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“Coinbase’s alleged failures deprive investors of critical protections, including rule books that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC,” the commission’s chairman, Gary Gensler, said in a statement.
Coinbase accused the SEC of carrying out only a “cursory investigation,” and emphasized that trading services will not be disrupted by legal proceedings.
The company balked at what it called the “SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry.”
In a statement to The Washington Post, Chief Legal Officer Paul Grewal said: “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
After the Coinbase lawsuit was announced Tuesday, Binance CEO Changpeng Zhao took to Twitter, a key digital meeting place for crypto enthusiasts, to criticize the government’s actions. “If you have to pick a fight with everyone, maybe you are the one at fault,” he said.
The SEC telegraphed its intentions for Coinbase earlier this year. In a March 22 blog post signed by Grewal, Coinbase signaled it had received a Wells Notice, signaling that charges are imminent.
“We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets,” Grewal wrote in March.
Coinbase is the largest cryptocurrency exchange based in the United States, with 108 million users, according to the SEC lawsuit. Exchanges, acting as both brokers and institutions that can hold assets, are the primary way for people to buy cryptocurrencies using sovereign currencies such as U.S. dollars.
The SEC suit specifically targets Coinbase’s staking program, which lets its users earn yields on five different crypto assets, which the SEC deemed an investment contract. In total, the SEC listed 12 popular cryptocurrencies available to buy through Coinbase that should be classified as securities, including SOL and ADA, the native tokens of the Solana and Cardano blockchains.
While the crypto markets tanked Monday on the news of the SEC’s lawsuit against Binance, they largely rebounded after the Coinbase announcement, with bitcoin on Tuesday afternoon trading at roughly the same price as it did at the start of the week.
Coinbase is accused of attempting to “run around” securities regulations, while Binance faces allegations beyond that, said John Reed Stark, former chief of the SEC’s office of internet enforcement.
“The Binance allegations are more serious, essentially alleging a criminal enterprise,” Stark said. “The Coinbase allegations don’t allege any fraud or thievery.”
But both lawsuits are a “scathing attack” on the crypto industry, he said.
“Pretty soon the SEC is not going to have anyone left to sue in the crypto space,” Stark said.
Julian Mark contributed to this report.
Source link: https://www.washingtonpost.com/business/2023/06/06/coinbase-sec-lawsuit/