Week In Crypto: You Have No Jurisdiction Over Crypto, Coinbase Tells SEC

June 30, 2023
Coinbase responds defiantly in its battle with the US Securities and Exchange Commission (SEC), Binance loses access to euro deposits and withdrawals, and FTX’s former head of compliance is accused of bribing whistleblowers to stay quiet.

Coinbase responds defiantly in its battle with the US Securities and Exchange Commission (SEC), Binance loses access to euro deposits and withdrawals, and FTX’s former head of compliance is accused of bribing whistleblowers to stay quiet.

Coinbase has fired its first salvo in its battle with the SEC, arguing in a new filing that the US securities regulator has no jurisdiction over crypto.

In 177 pages of legal argument, Coinbase takes issue with the SEC’s singling out of 13 crypto-assets that trade on the Coinbase platform, and which the SEC has deemed securities.

As prior to the lawsuit, Coinbase’s defence rests on its claim that it does not offer or sell securities, and so cannot be sued for operating an unlicensed securities exchange.

First, Coinbase objects to the SEC’s interpretation of the 1946 Supreme Court ruling in SEC v Howey.

Under the “Howey test”, a security is defined as an "investment contract" based on an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.

Specifically, Coinbase argues that none of the 13 crypto-assets referred to in the SEC’s lawsuit can be described as “investment contracts”.

When a buyer purchases a crypto-asset from a seller on the Coinbase exchange, there is no “investment contract” that obliges the seller to pool the buyer’s funds towards a common profit-seeking enterprise, as was the case in SEC v Howey.

Therefore, “the value that Coinbase purchasers receive through these transactions inheres in the things bought and traded”, and “the transactions are not securities transactions”.

Elsewhere in the filing, Coinbase includes several quotes to demonstrate its claim that the SEC has never had, and has never claimed to have, jurisdiction over crypto-assets up until recently.

In May 2021, for example, SEC chair Gary Gensler told Congress that the SEC lacks statutory authority to regulate businesses like Coinbase.

As per the complaint, Gensler said that “only Congress” could address the regulatory gap facing the crypto industry, “because right now the exchanges trading in these crypto-assets do not have a regulatory framework”.

“There is not a market regulator around these crypto exchanges,” Gensler added.

As argued by Coinbase, it was not until the end of 2022 that the SEC decided that crypto exchanges should be required to register as securities exchanges.

“The SEC’s about-face is not a product of material changes to Coinbase’s business since 2021, nor is it due to new information, nor is the reversal a product of legislative change,” said Coinbase.

“The only change is in the SEC’s position regarding its powers. That position is untenable as a matter of law, and its assertion through this enforcement action offends due process and the constitutional separation of powers.”

No more euros for Binance?

This week, Paysafe confirmed that it will cut ties with Binance as its European banking partner towards the end of September.

“Following a strategic review, we have taken the decision to cease offering our embedded wallet solution to Binance across the region,” a Paysafe spokesperson told VIXIO.

“Paysafe and Binance are now working to mutually implement an orderly and fair process to terminate this service over the next few months.”

In an email to European customers, Binance said it will be “changing the provider” of its euro deposits and withdrawals via SEPA bank transfer in Europe.

Binance said the loss of Paysafe will “only” affect SEPA deposits and withdrawals, and will not affect other fiat deposit or withdrawal services at this time.

So far this year, Binance has already lost access to deposit and withdrawal services in US dollars, British pounds and Australian dollars.

In each case, Binance has described the loss of access as “temporary”, but it has yet to find replacements for any of the partners it has lost in these markets.

Binance denied custody licence in Germany

The loss of Paysafe in Europe comes amid a difficult few weeks for Binance on the European mainland.

Two weeks ago, Binance announced that it will withdraw from the Netherlands in mid-July due to compliance issues, while last week a Belgian financial regulator ordered Binance to stop trading with immediate effect, due to concerns about the offshore nature of Binance.com.

This week in Germany, local news agency Finance Forward reported that Binance’s application for a crypto custody licence is soon to be rejected.

According to sources familiar with the matter, Germany’s Federal Financial Supervisory Authority (BaFin) has deemed that Binance’s application does not meet the agency’s criteria for the licence.

Although something of a misnomer in English, the BaFin crypto custody licence is the main licence that crypto exchanges are required to obtain to become “fully regulated”.

Without the licence, Binance can continue operating in a transitional capacity, but it will be prohibited from marketing its services to new customers.

Former FTX 'fixer' accused of bribery

Finally, this week FTX filed a new lawsuit against Daniel Friedberg, alleging that the former head of compliance paid off whistleblowers to keep quiet about the FTX fraud.

In the partly redacted complaint, FTX’s new management alleges that Friedberg has committed 11 counts of civil offences, including fraud, legal malpractice, breach of fiduciary duty and waste of corporate assets.

Described as Sam Bankman-Fried’s personal “fixer”, Friedberg is said to have paid off at least three whistleblowers to stay quiet, including one former FTX employee and one attorney of TransPacific, a company that sued FTX from 2019 to 2022.

Facing allegations of fraud, money laundering and unlicensed practices, Friedberg allegedly “bought the silence” of the TransPacific attorney for a fee of $3.3m.

With several former FTX executives already pleading guilty to criminal fraud, FTX’s new management wants Friedberg to hand over all compensation he received from FTX.

From 2017 to 2022, Friedberg received $4.7m in bonuses and salary from FTX, in addition to “tens of millions” of dollars in crypto-assets and an 8 percent ownership stake in FTX US.

Elsewhere in the suit, it is alleged that Joe Bankman, Bankman-Fried’s father, urged his son to employ Friedberg and to keep him “in the loop” so that “we have one person on top of everything”.

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