PHOTO-ILLUSTRATION BY MATTHEW COOLEY. PHOTOGRAPH IN ILLUSTRATION BY ADOBE STOCK
The Securities and Exchange Commission filed suit on Monday against global giant Binance, the largest cryptocurrency exchange in the world. A second lawsuit came the very next day against Coinbase, the largest exchange based in the United States. After years of regulatory turf wars over an industry widely seen as the Wild West, the SEC has planted its flag in the cryptocurrency industry as firmly as ever, hoping that courts will support the agency’s opinion that the vast majority of crypto assets qualify as a type of carefully regulated financial instrument known as securities, and agree that the unregistered crypto platforms that have set up shop in the United States are flagrantly violating the laws that regulate them.
Both cases allege that the companies were illegally operating without registering with the SEC, and offered unregistered securities in the form of crypto staking: programs in which customers lock up their crypto tokens in exchange for rewards. Binance is additionally charged with engaging in unregistered securities offerings by issuing BNB, a token that the SEC alleges functions like a share in the Binance company, and BUSD, a stablecoin pegged to the US dollar. Unlike in the Coinbase suit, the Binance case also includes complaints aimed directly at the company’s CEO, Changpeng “CZ” Chao.
These are hardly the first lawsuits that the agency has used to take aim at the industry — in fact, the regulator has already brought more than a hundred cases against crypto platforms and their operators in the last decade. But they are a marked shift from the previous scattershot enforcement against crypto Ponzi schemers, one-off token issuers, and smaller platforms. By going after Binance and Coinbase, the SEC is kicking off the final boss fight, aiming to end the nose-thumbing by two of the largest companies in the sector that have brazenly ignored the agency’s repeated warnings. The SEC has had to adopt a more aggressive approach with crypto, says David Gerard, author of Attack of the 50 Foot Blockchain. “The SEC is used to the institutions under its purview taking them seriously. Crypto resents the very concept of regulation — they’ve been scofflaws by culture since bitcoin was founded.”
These are hardly the first lawsuits that the agency has used to take aim at the industry — but they’re a marked shift.
It’s tough to be the buzzkill who comes in and shuts down a party when everyone’s having a good time, and the SEC seemed to know it. In 2021, the party was raging: crypto asset prices had skyrocketed, stories of overnight millionaires plastered the pages of newspapers, and companies like Crypto.com and FTX were splashing out millions of dollars on naming rights to sports stadiums and Super Bowl ads in hopes of convincing even more people to come join the mania. Entrepreneurs, venture capitalists, and lobbyists were describing crypto as the next iteration of finance, of technology, even of society — and influential people from the tech industry to Congress were buying the story. The SEC and other agencies mostly stayed out of the way.
The catastrophic implosion of the Terra project in May 2022 was among the first in a never-ending series of failures, soon followed by the crumbling of crypto hedge fund Three Arrows Capital, a linchpin of the sector whose insolvency destabilized other major firms. Through the summer, a slew of companies limited or halted withdrawals, leaving panicked customers unable to access the crypto assets they’d stored on the platforms. The bankruptcies followed, with Voyager Digital and Celsius filing within weeks of each other, followed later by BlockFi and Genesis. A once-titan of the crypto industry, Sam Bankman-Fried, swooped in and extended loans to floundering platforms. Only a few months later, his own crypto empire toppled amid allegations of fraud as it became apparent that billions in customer funds had gone missing.
It was only then that the SEC, the Commodity Futures Trading Commission, and the Department of Justice descended to belatedly clean up the mess they really should have prevented in the first place, unpopular though it might have been. Now that things have collapsed, this is an easier sell — people are expecting the bad players in the industry to be held to account. “The political will is there at last,” says Gerard. Researcher and computer scientist Nicholas Weaver describes the shift as a reaction to the sentiment that regulatory agencies failed to prevent the FTX catastrophe: “I think with the SEC… they have long had a habit of being reactive, coming in after the manure hits the whirling blades. But FTX was a big deal: billions of US persons’ [assets] lost, and it is clear from the record that if the existing rules were enforced against FTX then most US customers would be whole already.”
Since the string of collapses began, the SEC has sued Terra and its CEO Do Kwon, and criminal authorities are seeking Kwon’s extradition from Montenegro to face fraud charges. The New York Attorney General filed fraud charges against Celsius CEO Alex Mashinsky. The SEC sued both the bankrupt Genesis and its close business partner Gemini. FTX executives face civil complaints from both the SEC and CFTC, which have been placed on hold pending federal criminal cases. And predating the new SEC lawsuit against Binance is one from the CFTC, which alleges violations of commodities laws as it also describes activities that sound like they would be more suited to a criminal indictment.
In recent months, the SEC has telegraphed that it won’t solely act reactively to crypto’s collapses, filing charges only after companies have been reduced to piles of rubble. The SEC began with actions against some of the smaller crypto companies left standing amidst the carnage of the prior year.
The outcomes of these cases are likely to shape the future of the cryptocurrency industry in the United States.
However, the Binance complaint goes considerably beyond the one against Coinbase. While Coinbase’s CEO Brian Armstrong is not named as a defendant in the case, the Binance suit includes claims leveled directly at Zhao. That case also alleges much more serious malfeasance, including rampant wash trading, commingling of funds, material misstatements to investors, and intentionally pushing U.S.-based customers to circumvent the platform’s region-based restrictions. Like in the CFTC case, some of the behavior described in the SEC case seems criminal. “I think that the CFTC complaint and the SEC complaint evidence an egregious criminal enterprise on multiple levels,” former SEC enforcement attorney John Reed Stark tells Rolling Stone. Gerard agrees, speculating that criminal charges may have already been filed: “The CFTC complaint reeks of a shadow twin sealed indictment. The SEC complaint even more so.” Zhao has recently hired white-collar defense attorneys to represent him personally. (Both Binance and Coinbase did not respond to Rolling Stone‘s request for comment.)
The difference between the two cases is underscored by the emergency motion for a temporary restraining order against Binance that was filed by the SEC on Tuesday, which seeks to freeze assets belonging to Binance’s U.S. entities. A temporary restraining order is “the most powerful tool the SEC has,” says Stark. “It’s used sparingly,” reserved only for “really bad situation[s]” where substantial assets are deemed to be at serious risk. No such motion was filed in the Coinbase case, which also does not allege fraud or mishandling of customer funds.
The outcomes of these cases are likely to shape the future of the cryptocurrency industry in the United States, but the decisions probably aren’t coming anytime soon. For months, Coinbase has been posturing about its willingness to fight to the death against what they view as an increasingly aggressive yet opaque approach to the industry by the SEC, which Coinbase CEO Armstrong alleges is “harming America”. Binance has likewise promised to fight the SEC in court. Other legal battles between crypto firms and the SEC, such as the one involving the crypto token issuer Ripple, have dragged on for years. The industry will continue to be in limbo until then, with other unregistered platforms facing tough decisions over whether to delist the many prominent cryptocurrencies newly described by the SEC as securities, or whether to shut down crypto staking programs similar to those mentioned in the lawsuits. Meanwhile, traders have pulled more than $1.4 billion in assets out of Binance and more than $1.2 billion out of Coinbase.
To be sure, the SEC is taking on some risk here. Courts could embrace the crypto industry’s position, that the agency has overstepped by trying to enforce laws that don’t apply because they simply weren’t written to account for the crypto industry’s novel financial instruments, in a smackdown that would completely undermine the agency’s efforts to regulate the sector. But if the SEC emerges victorious — and their track record to date has been very strong — things will begin to look very different for crypto traders in the country. The Wild West era will draw to a close.