Legal Actions Against Binance, Coinbase Show Lack of Transparent Crypto Rules in US

MOSCOW (Sputnik), Kirill Krasilnikov - The charges against cryptocurrency trading platforms Binance and Coinbase filed by the US stock market regulator illustrate a lack of regulatory clarity regarding digital finance in the United States that needs to be addressed, experts told Sputnik.

The Securities and Exchange Commission (SEC) announced on Monday that it had filed 13 charges against Binance, operator of the world's largest cryptocurrency exchange, and its co-founder Changpeng Zhao for allegedly commingling user funds that were diverted to a European company controlled by Zhao. In detailing the case, the SEC said Zhao and Binance worked to subvert "their own controls" to allow high-net-worth US investors and customers to continue trading on Binance’s unregulated international exchange.

The next day, the SEC charged the cryptocurrency trading platform Coinbase with operating as an unregistered securities exchange. According to the complaint filed by the SEC, Coinbase has made billions of dollars by illegally facilitating the buying and selling of crypto asset securities since at least 2019.

Rosario Girasa, distinguished professor at Pace University's Lubin School of Business, explained that from the SEC's perspective, exchanges that provide services that allow people to sell tokens for money and profit through the efforts of third parties are, in almost all such cases, covered by the landmark US Supreme Court case SEC v. Howey, which broadly defines what is a security. As a result, exchanges that provide such services are subject to the Securities Exchange Act of 1934, which requires their registration.

"It would appear that the SEC will be successful in its action to require Coinbase to register as a securities exchange under the said statute notwithstanding the lack of clarity by the SEC except in its warning pronouncements to investors. There does not appear to be any evidence of fraud or other activity bordering on overt criminal behavior," Girasa continued.

At the same time, the expert noted that the case against Binance could have considerably more merit if the SEC's allegations are proven, since "according to the complaint, at best, there has been negligent commingling of assets by the individual parties who created Binance."

"The company alleges that Binance.com restricted its activities to non-US investors but the SEC alleges that the claim was blatantly false inasmuch as heavily financed investors did partake therein. If commingling of assets by the founders for their personal benefit are proven to have merit, it would appear that civil and possibly criminal charges may eventually take place if investors are substantially harmed by the alleged commingling," Girasa stated.

A lawyer for a blockchain software development company, who wished to remain anonymous, told Sputnik that the argument that "platforms were offering securities that should have been registered with the commission" has been made by the SEC in the past and was successful in some cases.

"As for the companies' chances of fighting these charges in court, it's hard to say without being privy to their specific defense strategies. Both companies are represented by top-tier law firms with extensive experience in dealing with SEC enforcement actions. So, I anticipate they will put forth vigorous defenses, which could take years to resolve," they said.

Clear Guidelines Needed

Binance, in a statement also circulated on Twitter, described the SEC’s lawsuit as "baseless" and "unjustified by the facts, by the law, or by the Commission’s own precedent." The crypto exchange operator added that it intends "to vigorously defend" itself. It accused the SEC of seeking the "near eradication" of the crypto industry with similar actions against other names in the industry such as Coinbase, Gemini and Kraken (crypto-trading platform).

The company also called on the US Congress to intervene with bipartisan legislation that would create a workable regulatory regime for digital assets and rein in what it called bureaucratic overreach, without which "our country’s role as a leader and innovator will continue to be undermined."

Coinbase, for its part, filed a lawsuit against the SEC back in April demanding that the regulator "use its formal rulemaking process to provide guidance for the crypto industry." The blockchain lawyer approached by Sputnik stressed that Coinbase has shown an active commitment to collaboration with the SEC, having met with the regulator more than 25 times, "a testament to its dedication to transparency and compliance with regulatory standards," as the expert put it.

"However, despite Coinbase's proactive and collaborative approach, it seems the SEC has been reticent in providing the necessary clarity the company has requested. This lack of explicit regulatory guidance has left Coinbase in a challenging position, having to navigate the complex and evolving landscape of cryptocurrency regulation without the benefit of clear instructions from the SEC," the lawyer said.

Girasa observed that the current litigation is part of an ongoing effort by the SEC to exercise jurisdiction over crypto assets, which has occasionally clashed with other US federal agencies such as the Commodity Futures Trading Commission (CFTC) over who oversees such assets.

"The litigation brings to the forefront a major issue that has not been addressed, that is, the need for Congressional action to determine by statute the clear lines of jurisdiction of the SEC and the CFTC as well as determining the nature of the various new offerings, whether they are cryptocurrencies, non-fungible tokens [NFTs], emanations derived from ChatGPT and so on. Without such statutory authority and regulations to be rendered in their exercise, it appears to be unfair and a roadblock to further developments," the professor concluded.

Meanwhile, the anonymous lawyer predicted that if the SEC wins in court, it will have a major impact on the crypto industry, both in the US and around the world, leading to a tighter regulatory framework for crypto exchanges, and could cause some companies to rethink their strategies or even leave the US market.

"As for measures to shield from regulatory attention, one approach is to engage more proactively with regulators to understand their expectations and concerns. This could include seeking clarification on gray areas of the law, voluntarily complying with relevant regulations and promoting transparency in their operations," the expert suggested, adding that "it seems likely that the SEC and other regulators will continue to scrutinize the crypto industry closely" and "the recent actions against Coinbase and Binance might be a sign of what's to come."