Week In Crypto: Coinbase Hit By Major SEC Lawsuit As Crackdown Continues

June 9, 2023
Federal securities charges finally hit Coinbase, a US regulator attempts to repatriate Binance US assets, and a former central banker is tipped to take over as CEO from Binance founder Changpeng Zhao.

Federal securities charges finally hit Coinbase, a US regulator attempts to repatriate Binance US assets, and a former central banker is tipped to take over as CEO from Binance founder Changpeng Zhao.

After several months of hinting that it is building a case against Coinbase, the US Securities and Exchange Commission (SEC) has finally filed charges against the US' largest crypto exchange.

In a new 101-page lawsuit, the SEC alleges that since at least 2019, Coinbase has operated an unlicensed securities exchange, brokerage and clearing agency. In addition, the SEC alleges that Coinbase has offered and sold unregistered securities through its Coinbase Earn product.

“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,” the complaint notes.

“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.”

Coinbase Earn, its staking-as-a-service offering, is dealt with in a separate charge, one of five in total.

The SEC alleges that Coinbase’s crypto staking services allow investors to earn financial returns through Coinbase’s “managerial efforts”.

Through Coinbase Earn, investors’ assets are transferred to, pooled and staked by Coinbase in exchange for rewards, from which Coinbase takes a 25 to 35 percent commission.

“Investors understand that Coinbase will expend efforts and leverage its experience and expertise to generate returns,” the complaint notes.

“The staking program includes five stakeable crypto-assets, and the staking program as it applies to each of these five assets is an investment contract, and therefore a security.”

CEO Brian Armstrong spared by SEC

As covered by VIXIO earlier this week, the SEC’s lawsuit against Coinbase comes a day after a similar lawsuit was filed against Binance.

Although the charges in each case are almost identical, there are nonetheless some important differences.

The first is that Coinbase CEO Brian Armstrong was spared being named as a defendant, whereas Binance CEO Changpeng Zhao was named as a defendant alongside three Binance subsidiaries.

The second is that Binance and Zhao are accused of defrauding customers and investors by misrepresenting Binance’s controls against market abuse, whereas fraud charges do not feature in the Coinbase suit.

However, one thing the two cases do have in common is that both Binance and Coinbase have said they will defend themselves against all charges.

Responding to the lawsuit, Armstrong said on Twitter: “Instead of publishing a clear rulebook, 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.

“In case it’s not obvious,” Armstrong added, “the complaint is exclusively focused on what is or is not a security, and we are confident in our facts and the law.”

Lawmakers weigh in

So far, Armstrong has attracted the support of several US lawmakers, including Senator Bill Hagerty (R-TN) and Senator Cynthia Lummis (R-WY).

Paraphrasing an argument used by Armstrong, Hagerty questioned how US regulators allowed Coinbase to go public in 2021 if at the time it was not in compliance with securities laws.

“The SEC is weaponizing their role to kill an industry,” said Hagerty. “Allowing a company to list publicly and then stonewalling their attempts to register is indefensible.”

“Gary Gensler,” he added, referring to the chair of the SEC, “expect to hear from Congress.”

Lummis also amplified Armstrong’s defence that Coinbase had tried to register with the SEC but its attempts were rebuffed.

“The SEC has failed to provide a path for digital asset exchanges to register, and even worse, has failed to provide adequate legal guidance on what differentiates a security from a commodity,” said Lummis.

“The SEC’s continued reliance on regulation by enforcement continues to harm consumers. Real consumer protection requires creating a robust legal framework that exchanges can comply with, not pushing the industry offshore or into the shadows.”

On the other hand, Armstrong’s opponents appear to include US Treasury secretary Janet Yellen.

Speaking to CNBC, Yellen said she is “very supportive” of the SEC and the Commodity Futures Trading Commission (CFTC) using “the tools they have” to pursue enforcement action against crypto firms.

However, Yellen also said that there are “holes in the system” where “additional regulation” could help. “We would like to work with Congress to see additional legislation passed,” she said.

Repatriate the assets, SEC tells Binance

In a new development since the initial case was opened, the SEC has filed an “emergency” application seeking a temporary restraining order on assets belonging to Binance US customers.

Specifically, the order calls on US courts to direct Binance to repatriate those assets so that they can be protected and can remain in the US while litigation continues.

In addition, the SEC is seeking an order prohibiting the destruction of records by Binance and Zhao, an order requiring sworn accounting of assets and an order authorising “expedited discovery”.

“Given that Binance’s and Zhao’s location abroad and BAM Trading’s inability to provide accurate information, the SEC does not yet know the full extent of Defendants’ assets, and the whereabouts of investor money, or the status or location of other assets that may be used to satisfy a money judgement against Defendants,” the SEC noted.

“An accounting will be a critical next step to ascertain these facts.”

Former central banker tipped to take over as Binance CEO

In the week prior to the SEC lawsuit, Binance announced that it has appointed Richard Teng as its new head of regional markets.

Prior to joining Binance in 2021, Teng served as CEO of the Abu Dhabi Global Market (ADGM) for six years and director of corporate finance at the Monetary Authority of Singapore (MAS) for 13 years.

According to a former Binance employee quoted by CoinDesk, Teng is potentially being lined up to take over as CEO from Zhao, who founded Binance in 2017.

“Both senior leadership and regulators have discussed behind closed doors that Richard Teng is the only leader that could step into CZ’s shoes and both continue building the company in his vision while helping bridge the existing gap between the industry and regulators,” said the source, who asked to remain anonymous.

In an interview with CoinDesk, Teng played down, but did not deny, the source’s claims.

“To speculate on such things would be premature,” he said. “Let me just stress we have a very strong management team in place and many strong leaders looking after different parts of business.

“I’m just happy to be part of that and to try and support the company’s agenda and aspirations.”

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