In 2023, the U.S. Securities and Exchange Commission (SEC) initiated lawsuits against the world’s three largest crypto exchanges – Binance, Coinbase, and Kraken – signaling a new era for the previously unrestrained crypto industry. These legal actions have raised questions about the future of the industry and the regulatory landscape it will face moving forward.
Key Takeaways
- The SEC has filed lawsuits against Binance, Coinbase, and Kraken for various regulatory violations.
- The lawsuits have significant implications for the crypto industry, including potential changes in how cryptocurrencies are classified and traded.
- The market has shown resilience despite the legal challenges, with major cryptocurrencies like Bitcoin and Ethereum rebounding quickly.
SEC vs. Binance: Accusations and Market Impact
On June 5, 2023, the SEC filed a lawsuit against Binance, accusing the exchange of several violations, including running an unregistered exchange, selling Binance-owned cryptos BNB and BUSD, and using customer funds for its own interests. The allegations against Binance are severe, drawing parallels to the now-defunct FTX exchange.
The lawsuit remains unresolved as of late November 2023. Reports suggest that the SEC is investigating whether Binance and its founder, Changpeng Zhao (CZ), had a “backdoor” to control assets on the Binance.US platform. Binance has responded by filing a motion to dismiss the lawsuit.
In November 2023, Binance agreed to pay a $4.3 billion fine to settle charges from the US Department of Justice (DoJ), Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN). This settlement led to CZ stepping down as CEO, with Richard Teng taking over the role.
SEC vs. Kraken: Similar Complaints
On November 20, 2023, the SEC filed a complaint against Kraken, accusing the exchange of operating as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC also alleged that Kraken commingled customer funds for operating expenses, posing a significant risk to its customers.
Kraken has denied the charges and intends to defend itself in court. This is not the first time Kraken has faced legal action from the SEC; in February 2023, the exchange agreed to cease its crypto staking services and pay $30 million in fines.
SEC vs. Coinbase: Compliance Issues
A day after the Binance lawsuit, the SEC charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. The SEC also took issue with Coinbase’s staking-as-a-service program and its marketing campaigns that positioned the exchange as compliant with regulations.
Coinbase has responded by stating that it had attempted to register parts of its business with the SEC but faced a lack of cooperation from the regulator. The exchange has also asked a U.S. court to dismiss the lawsuit.
Market Reactions and Future Implications
Despite the legal challenges, the cryptocurrency market has shown resilience. Major cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) quickly rebounded from initial sell-offs. However, other cryptocurrencies named as securities by the SEC, such as BNB, ADA, SOL, MATIC, and ATOM, experienced selling pressure.
The lawsuits have led to significant withdrawals from Binance, with users withdrawing over $3 billion within 24 hours of the SEC lawsuit. Coinbase’s stock also saw a 12% drop following the lawsuit but has since recovered, posting year-to-date gains of over 250% as of late November 2023.
The Road Ahead for the Crypto Industry
The crypto industry is coming to terms with the inevitability of regulations. There is a preference within the industry for cryptocurrencies to be regulated by the CFTC rather than the SEC. Crypto insiders are lobbying for cryptocurrencies to be classified as commodities, which would allow for less stringent regulatory requirements.
The SEC’s actions have highlighted the need for clear regulations in the crypto industry. With better regulatory clarity, crypto exchanges are expected to emerge stronger, safer, and more acceptable to the broader public.
Understanding the SEC’s Role
The SEC was established in 1934 to restore public confidence in the stock market after the 1929 crash. The regulator ensures that listed companies provide truthful information and inform investors about the risks involved. The SEC also regulates brokers, dealers, and exchanges.
What Are Binance, Coinbase, and Kraken?
- Binance: The world’s largest crypto exchange, founded by Changpeng Zhao (CZ). It operates as Binance.US in the U.S.
- Coinbase: Founded in 2012 by Brian Armstrong, Coinbase is the largest crypto exchange by trade volume in the U.S. It recently announced the launch of a blockchain network called Base.
- Kraken: One of the oldest crypto exchanges, founded in 2011. Kraken offers over 200 different cryptocurrencies and supports transactions in eight fiat currencies.
