The SEC's crypto crackdown comes for Binance and Coinbase

The SEC, aka the US Securities and Exchange Commission, has really been putting its foot down on cryptocurrency.

The SEC's crypto crackdown comes for Binance and Coinbase
A smartphone with displayed Binance and Coinbase logos and representation of cryptocurrencies are placed on a keyboard in this illustration taken, June 8, 2023. Reuters/Dado Ruvic/Illustration

The backstory: The SEC, aka the US Securities and Exchange Commission, has really been putting its foot down on cryptocurrency. Essentially, the agency believes that crypto should be regulated in the same way as securities, like stocks and bonds. But, a lot of crypto firms don’t agree that their products are the same as securities, and they kind of think there should be some new rules adapted for regulating the crypto sphere. This has led to a lot of crypto firms not registering with the SEC, which would be required for any securities brokers.  

SEC head honcho Gary Gensler has even called the whole crypto scene the "Wild West." So, the SEC is cracking down on these crypto companies to make sure they fall in line with the rules.

More recently: Last year, crypto exchange Coinbase was frustrated with the SEC's unclear rules on crypto and asked for some clarity. It also suggested creating new regulations that were more tailored to the digital asset world. See, Coinbase felt like the SEC was using an “enforcement only” approach by cracking down on crypto platforms without setting clear guidelines for them to follow from the outset. Then, the SEC hit back with a Wells notice for Coinbase in March. It was like a warning, saying it could (and might) take enforcement action against Coinbase. The SEC was eyeing some specific tokens and Coinbase's staking service called Coinbase Earn. But Coinbase wasn't backing down from its earlier request. So, it decided to take the SEC to court to get the answers it wanted about those regulations.

Last month, the SEC also targeted another crypto exchange, Bittrex, based in Seattle. The agency accused Bittrex and its former CEO of running an unregistered securities exchange. Three weeks later, Bittrex filed for bankruptcy protection and closed up shop in the US, saying it would work to return the crypto holdings to US customers through the bankruptcy court. But the exchange said it wouldn’t affect its international arm, Bittrex Global, which is still up and running outside of the US.

The development: Last week, the SEC, armed with lawsuits, took aim at two crypto powerhouses. First up was Binance, which is the biggest crypto exchange out there, and its founder, Changpeng Zhao. The regulator accused the company of encouraging US customers to trade on its unregulated international exchange, mixing investor money with its own stash and breaking securities laws. The agency says Binance was intentionally using its US-based arm to shield its activities and get around regulations by helping big US customers avoid the rules and continue trading on the unregulated exchange.

But Binance downplayed the accusations. Zhao tweeted “4,” which is a reference in the Binance community to ignore fear, uncertainty and doubt, or “FUD.” He also said the company would issue a response once they had reviewed the official complaint.

The SEC also had Coinbase in its sights. The regulator filed a lawsuit saying Coinbase was playing the broker and exchange game without the proper registration. It pointed fingers at Coinbase's prime brokerage, exchange and staking programs as the culprits. Coinbase, though, fired back, saying it’s been playing by the rules, and the exchange is even ready to go to the Supreme Court on the issue if necessary.

And then there's Robinhood, the popular trading app. It decided to pull the plug on trading for certain coins like Cardano, Polygon and Solana. And The crypto exchange spilled the beans that it's closing down its US institutional exchange. All of this sent shockwaves through the market, with those coins mentioned losing a good chunk of their value. Binance also announced it would be halting dollar deposits and withdrawals as early as June 13 since the SEC asked a court to freeze its assets.

Key comments:

"US regulators have made it clear they want to rein in crypto within their borders," said Michael Safai, co-founder of London-based Dexterity Capital, wrote via a message to Bloomberg on Saturday. "Investors need to be wary as more western players step away, leaving markets thin and subject to sudden volatility spikes."

"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions," said SEC chair Gary Gensler in a statement.

"We are operating as business as usual," said Paul Grewal, Coinbase's chief legal officer. "These cases sometimes aren't resolved not only for many months, but many years."

"Simply put, today's filing is unjustified by the facts, by the law, or by the Commission's own precedent," said Binance's US business in a statement.

"This is going to affect people's attitude toward trading, and Coinbase is going to have to think about that," said Timothy Massad, former chairman of the Commodity Futures Trading Commission (CFTC). "Can it really afford to just fight this out, or does it have an incentive to try to come up with a settlement?"