Binance and Coinbase are being sued by the SEC…A ton of allegations
“ The SEC has fired a shot at Coinbase (and the crypto sector in general)”
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Binance and Coinbase are being sued by the SEC…A ton of allegations…Should crypto exchanges be considered illegal brokers? And should crypto be treated as a security?...
The SEC has fired a shot at Coinbase (and the crypto sector in general)
Most investors didn’t expect this…but it was bound to happen sooner or later…
A few days ago, the SEC filed a 101-page lawsuit against the largest crypto exchange in the US, Coinbase. The Commission is accusing the crypto firm of operating as an “unregistered broker” since at least 2019.
Their accusations are targeted specifically at Coinbase, but experts agree that the outcome will have a much broader effect across the crypto landscape.
This is a huge event…but many believe it was inevitable. Longtime readers should look back to the discussion we held in 2021, where we talked about what whiskey barrels in the 1970’s, gift cards in 2021, and crypto may have in common…
The SEC specifically referenced 13 cryptocurrencies that it believes Coinbase offers and sells "as investment contracts, and thus as securities." It should be noted that neither Bitcoin or Ethereum made the list. But their accusations would put the firm in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. The lawsuit seems to be pushing Coinbase to stop dealing in these cryptos ASAP.
The morning of the lawsuit, SEC chair Gary Gensler did an interview with CNBC. And during the interview, he indicated that he was thinking about all crypto exchanges when they filed the lawsuit…
“These trading platforms, they call themselves exchanges, are commingling a number of functions... We don't see the New York Stock Exchange operating a hedge fund.”
That last part seems to be a reference to failed crypto exchange FTX… If you remember correctly, that was the firm run by Sam Bankman-Fried, which has been accused of using customer deposits to fund speculative investments and other crooked endeavors.
What does Coinbase say about it?
Coinbase has always said that the US needs clearer regulations in the crypto space, which is the same thing CEO Brian Armstrong said the day the suit was filed. He revealed that the firm had tried to register as a broker in the past and even met with the SEC 30 times last year in search of policy guidance.
The day of the lawsuit, Armstrong wrote this on Twitter…
“Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”
“Btw, in case it's not obvious, the Coinbase suit is very different from others out there – the complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law.”
Armstrong also stated that this was the reason Congress "is introducing new legislation to fix the situation, and the rest of the world is moving to put clear rules in place to support this technology."
It should be noted that a huge draft bill was recently introduced into the House of Representatives that looks to tame the so-called crypto “wild West.” Part of the bill’s function is to create official definitions for crypto terms, such as blockchain.
Our initial thoughts…
It should be noted that this all took place a day after the SEC filed a separate lawsuit against Binance, which is the largest crypto exchange in the world, and their founder, Changpeng Zhao (ironically, he’s partly responsible for Bankman-Fried’s legal troubles after he called Bankman-Fried out on getting close with US regulators).
The suit against Binance, which was 136 pages long, also points to several crypto coins that the SEC feels are securities. They did seem to come down harder on Binance than Coinbase, with one sentence claiming that Binance’s leaders "enriched themselves by billions of U.S. dollars while placing investors' assets at significant risk."
The lawsuit against Coinbase isn’t as harsh, but it is still very important. It seems to be more about the SEC figuring out which coins it considers to be securities in the crypto space. According to the lawsuit…
“This includes, but is not limited to, the units of each of the crypto asset securities... with trading symbols SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO…”
The SEC also seems to be worried about Coinbase’s “staking” efforts. This takes place when holders of a particular crypto make an agreement to lock up their coins on a blockchain network for a certain period of time in exchange for a reward.
Regulators aren’t pleased with the way Coinbase handles “staking”... By way of illustration, the crypto firm offers a “pro rata” return on staked coins, while charging a 35% commission on staking rewards from cryptos Solana (SOL) and Cardano (ADA). This is why regulators consider Coinbase’s staking program to be a “common enterprise” that is entering into an “investment contract” with users. In their eyes, that makes these coins securities.
The SEC believes that Coinbase is acting like a broker, exchange, and clearing agency all at once.
“Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets.”
“All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.”
What does Crypto Capital editor Eric Wade think about all this?
Regular Digest readers are already aware that Eric and his team have been discussing the crypto regulation story for years now. Readers who are subscribed to Eric’s Crypto Capital and Crypto Cashflow will see more analysis of this story in the near future.
I talked with Eric on the day of the lawsuit to get his thoughts for Digest readers. He believes the suit against Coinbase is pointing in two specific directions: it’s going after coins that either offer a staking yield or can earn a yield through lending and, separately, the ones they consider “unregistered securities.” As he said…
“Both are somewhat low-hanging fruit because the SEC hasn't really defined the rules, other than saying that their existing rules are all that anyone needs to know. (The crypto industry mostly disagrees and wants to fight this fight.)”
“But there's more to this one, and from our side (crypto industry) Gary Gensler looks like he's overreaching or trying to force the issue that he's in charge, when that is actually not entirely clear. What I mean by that is the SEC approved Coinbase's public listing not long ago!”
Eric makes a good point here and it’s something I thought about when I read the lawsuit. Coinbase got SEC approval to become a publicly traded company… If that’s the case (and it is), then how can the company have been making “ill gotten gains” while acting as an “unregistered broker” for over four years, as the suit implies?
Be on the lookout for more…
“I may be the last guy hanging onto the last thread of the last rope on this one as everyone else seems to be begging for the SEC to shackle America to more regulations... but I say NO. Not many of them are securities.”
For the other side of the argument, an analyst on Eric’s research team named Stephen Wooldridge II believes more people could be open to crypto trading if it had clear regulations, though that could be hard to accomplish. As Stephen said…
“Crypto by its very decentralized nature is a hard thing to regulate, so it'll be interesting to see what the next year or two look like.”
He said that around two years ago and, as Eric made clear, the lawsuit is a very public reminder of the issues that continue to plague the crypto space…
“One issue that we haven't entirely sorted out is what will be the effect of all this attacking with respect to getting money into and out of crypto. The cooling of fiat onramps and offramps may pinch retail users, but won't completely hamper the industry which, by the way, is currently worth over $1 trillion in market cap.”
We will have more updates for you in the Digest as the story continues. But the one thing that has already been made clear is new financial laws will be created…though it may be a while, given how slowly lawsuits can develop.
Eric also mentioned crypto regulation during the presentations he gave at our Stansberry Research conference last October in Boston and in Las Vegas in 2021. (Quick side-note: we’re coming back to Vegas for our conference this year. Find ticket, venue and speaker information here.)