Binance and Coinbase sued by SEC in cryptocurrency crackdown

The US Securities and Exchange Commission (SEC) is cracking down against cryptocurrency operators, by suing two of the most important players in the sector: Binance and Coinbase. 

On Tuesday 6 June, the SEC asked a federal court to issue a temporary restraining order to freeze the US assets of cryptocurrency exchange Binance. The petition followed the regulator's launch of a suit against the platform the previous day. 

In the filing, the SEC accused Binance and founder Changpeng Zhao of engaging in a "web of deception" and "calculated evasion of the law", that included mishandling customer funds, artificially inflating trading volume on the site and evading US regulation.

The company and its founder have also been accused of diverting customer funds to companies controlled by Zhao.

In response, Binance, which is active in more than 100 countries, denied the claims that customer money had been put at risk, and said it would defend the platform "vigorously".

"While we take the SEC's allegations seriously, they should not be the subject of an SEC enforcement action," Binance said, adding that the legal action was an example of regulators' "misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry".

Binance.US also clarified its user assets would remain safe and the platform would continue normal deposit and withdrawal operations. 

The suit was the second one launched against a crypto player in the last three days, with the SEC also suing Coinbase on Tuesday. 

The SEC accused the largest digital currency trading platform in the US of failing to register as an SEC venue and operating as an “unregistered broker, exchange and clearing agency” in violation of US securities regulations.

It stated the exchange had made billions of dollars by "unlawfully facilitating the buying and selling of crypto asset securities".

“Since at least 2019, through the Coinbase platform, Coinbase has operated as an unregistered broker ... an unregistered exchange ... and an unregistered clearing agency,” the SEC said.

“By collapsing these functions into a single platform and failing to register with the SEC as to any of the three functions, and not having qualified for any applicable exemptions from registration, Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors.”

Financial regulators from 10 states, including California and Alabama, also filed legal actions alleging that Coinbase was operating as an unregistered securities dealer.

"As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them," said Gurbir S Grewal, director of the SEC's division of enforcement.

"You simply can't ignore the rules because you don't like them or because you'd prefer different ones: the consequences for the investing public are far too great."

Coinbase responded by stating that the rules were not clear.

"The SEC's reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America's economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance," said Paul Grewal, general counsel of Coinbase.

"The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we'll continue to operate our business as usual."

Coinbase had 110 million users and $80bn in assets at the end of 2022.

In April, the European Parliament approved what has been described as the "world’s most sweeping cryptocurrency rules”, also known as the Markets in Crypto Act (MiCA), with the aim of preventing money laundering and protecting customers.

The UK and US are two major crypto centres that might be influenced by these rules, as regulators in both countries have warned of the need for stronger safeguards in the sector. Earlier this year, the UK announced its plans to regulate the cryptocurrency industry, with the government looking to rein in some of the reckless business practices that characterise the “turbulent industry”.