In 2023, the U.S. Securities and Exchange Commission (SEC) sued the world’s three largest crypto exchanges – Binance, Coinbase, and Kraken – marking the start of a new era for the unrestrained crypto industry. This article delves into the lawsuits, market responses, and the potential future of the industry.
Key Takeaways
- The SEC has filed lawsuits against Binance, Coinbase, and Kraken, accusing them of various securities law violations.
- The lawsuits have significant implications for the crypto industry, including potential regulatory changes and market reactions.
- The cases are expected to extend well into 2024, with ongoing investigations and legal proceedings.
SEC vs. Binance: Accusations and Market Impact
On June 5, 2023, the SEC filed a lawsuit against Binance, accusing the exchange of running an unregistered exchange, selling Binance-owned cryptos BNB and BUSD stablecoin, and offering staking and profit-generating programs. The SEC also alleged that Binance misrepresented investor protection controls, did not allow Binance.US to operate independently, and used customer funds for its own interests.
The lawsuit has not been resolved as of late November 2023. The SEC is investigating whether Binance and its founder Changpeng Zhao had a “backdoor” to control assets on the Binance.US platform. Binance has responded by filing a motion to dismiss the lawsuit. The case is expected to extend into 2024, with Binance agreeing to pay a $4.3 billion fine to settle charges made by the US Department of Justice (DoJ), Commodity Futures Trading Commission (CFTC), and Financial Crimes Enforcement Network (FinCEN).
SEC vs. Kraken: Similar Complaints Filed
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 alleged that Kraken commingled customer funds for payment of operating expenses, despite an auditor identifying it as a significant risk of loss to its customers. Kraken has denied the charges and intends to defend itself in court.
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 marketing campaigns that positioned the exchange as compliant. Coinbase has responded by agreeing to register some portion of its business with the regulator, but the SEC has not cooperated. The case is expected to extend into 2024.
Market Reactions to SEC Lawsuits
The cryptocurrency market has shown resilience despite the SEC lawsuits. Bitcoin (BTC) and Ether (ETH) rebounded quickly from initial sell-offs. However, cryptocurrencies like BNB, ADA, SOL, MATIC, and ATOM saw selling pressure after being named “investment contracts” by the SEC. Data firm Nansen reported that users on Binance withdrew over $3 billion within 24 hours of the SEC lawsuit.
Future of the Crypto Industry
The crypto industry is reluctantly coming to terms with the inevitability of regulations. There is a preference within the industry for cryptocurrencies to be regulated by the US commodities regulator CFTC, rather than the SEC. Crypto insiders are lobbying for cryptocurrencies to be classified as commodities to avoid strict disclosure compliances. The SEC’s actions have driven some crypto companies to consider moving offshore to more crypto-friendly jurisdictions.
Understanding the SEC’s Concerns
The SEC aims to regulate cryptocurrencies and subject crypto companies, brokers, dealers, and exchanges to the same standards as the stock market. However, as cryptocurrencies have only gained prominence in recent years, there are no regulations designed specifically for them. The SEC’s legal proceedings against Binance, Coinbase, and Kraken are part of its efforts to treat cryptocurrencies like securities.
The Bottom Line: Crypto Regulations Are Inevitable
Cryptocurrency regulation is inevitable. Unlike China’s abrupt and blanket ban on crypto activity, the U.S. is expected to provide a fair deal for the crypto industry. With better clarity on regulations, crypto exchanges are expected to emerge stronger, safer, and more acceptable than ever.
