Storm Clouds for Binance and Coinbase With The S.E.C.

Hi everyone, I’m Rick Barron, your host, and welcome to my podcast, That’s Life, I Swear

Is cryptocurrency drifting from being a niche to a fad? As of late, the S.E.C. has filed charges against Binance and Coinbase for money laundering and not registering as a broker. Will these two companies be heading for the crypto junk pile to join FTX?

Let’s jump into this 

In December of 2022, Sam Bankman-Fried, the disgraced founder of the collapsed cryptocurrency exchange FTX, was arrested in the Bahamas after U.S. prosecutors filed criminal charges.

Sam Bankman-Fried arrested in Bahamas. Courtesy of Engadget

The Commodity Futures Trading Commission (CFTC) and the Department of Justice (DOJ) are now investigating FTX for possible market manipulation and insider trading. The CFTC also alleges that FTX failed to register as a futures commission merchant and comply with anti-money laundering regulations. FTX has denied any wrongdoing.

Since December of 2022, the world of cryptocurrencies has been going into a spiral, and the heat is building up that is making the allure of cryptocurrency go sour and turning into perhaps a fad that many thought it always was.

Why does this matter?

The S.E.C. recent actions against two major crypto companies reflect a broad effort to end what U.S. authorities see as the era of lawlessness in the industry. The two companies currently in the spotlight are Coinbase and Binance. Both are facing charges similar to FTX.

The potential fallout if these two companies are found guilty of wrongdoing in the field of cryptocurrency is, well, pretty significant. Both of them are major players in the cryptocurrency industry, and a guilty verdict could damage the entire industry's reputation. It could also lead to increased regulation of cryptocurrency exchanges, making it more difficult for people to buy and sell cryptocurrencies.

So, what are the charges?

CEO of Coinbase, Brian Armstrong. Courtesy of CoinDesk

Coinbase: The Securities and Exchange Commission (SEC) is suing Coinbase for possible securities law violations. The SEC is specifically looking into whether Coinbase allowed unregistered securities to trade on its platform. The commission also went after Coinbase, alleging that the exchange offered cryptocurrencies assets that are identified as securities.  

Coinbase has denied any wrongdoing.

CEO of Binance. Courtesy of: Fox Business

Binance: The Commodity Futures Trading Commission (CFTC) is suing Binance on 13 charges for operating an unregistered futures trading platform. The CFTC also alleges that Binance failed to register as a futures commission merchant and comply with anti-money laundering regulations. In addition, the SEC is looking at offerings and sales of tokens. Just like Coinbase, Binance has denied any wrongdoing.

Why now?

Although Binance and Coinbase may not be household names, they are well known in the world of crypto. Billions of dollars’ worth of digital assets change hands on these platforms every day, and they have customers all over the world.

Chairman of S.E.C., Gary Gensler. Courtesy of AdvisorHub

Leading the charge against Coinbase and Binance is Gary Gensler, Chairman of the Securities and Exchange Commission. From his perspective, the crypto industry has been a Wild West with few regulations and laws governing it, a fact that many crypto fans see as a feature, not a bug.

The lawsuits are significant moves by Gary Gensler, who took office in April of 2021, to try to regulate the entire crypto industry. The core SEC strategy is focused on using its enforcement division to subdue crypto companies and show why its regulations apply to crypto activities.

Over the past two years, Gary and his staff have had numerous meetings with cryptocurrency exchanges that were seeking special exemptions from the laws governing the rest of Wall Street. Needless to say the talks never got anywhere. 

In short Gary Gensler sees almost all cryptocurrencies are securities, thus current laws give his agency the power to regulate them, and the sites and apps on which they are bought and sold.

Although these two lawsuits are different in many ways, at their core, Coinbase and Binance are both being accused of failing to register their exchanges with the SEC.  

John Reed Stark, a former SEC enforcement attorney. “I think anyone who has crypto on any exchange should take it off of that exchange immediately. Period, end of story.”

John thinks the chances are good that the SEC will prevail. The SEC has brought close to 150 cases in the area of crypto. While many of those cases are still pending, the SEC’s track record so far has been extremely strong. If the latest lawsuits stand in court, the exchanges will have to become compliant under the SEC’s regulatory rules — and if not, they could shut down in the United Sates.

So what’s a crypto guy to do with all this heat coming down on the industry?

With the U.S. regulatory crusade against digital finance going into hyperdrive, other Crypto exchanges are becoming fearful they may be the next one on the list to get a knock at the door from the S.E.C.  

What other options are there? Is there a way out of this legal jungle? Yes, there is, and it’s called going abroad.

CoinShares, a leading European asset manager specializing in digital assets, said the U.S. share of spot bitcoin and ether trading has declined this year to 70%, from above 90% in March of 2023.

Definition: What is a spot market in crypto? The base market, where crypto assets are instantaneously exchanged and settled, is known as a spot market, and trading in this market includes buying digital currencies like Bitcoin (BTC) or other altcoins and holding them until their value rises.

So, where did the 20% go? Companies such as Binance, Coinbase, Gemini, and others are expanding into Asia, the British Virgin Islands, and France. The cryptocurrency giants are also looking at Europe as becoming thefuture epicenterof crypto. Not to be denied in getting a piece of the action, regulatory approaches are being developed in Switzerland, the U.K., Hong Kong, and the United Arab Emirates. 

Europe has a huge appetite for crypto innovation, but be careful what you wish for. Regulators there will soon discover defying the rules of regular finance isn’t a bug of crypto, it’s what defines it as a key feature, one that has paved the way for rampant speculation while reviving the age-old phenomena such as bank runs.

Footnote
As I was pulling this episode together, I read in the newspaper where the S.E.C. and Binance reached an agreement resulting from a U.S. district judge decision. The judgment orders Binance’s American exchange [Binance.US] to keep all assets in the U.S. and limit spending to expenses needed for regular operations. Taking this step will safeguard customer assets as the company continues to battle a government lawsuit.

Crypto tidbits

1.     Coinbase was founded in June/2012; Went public on April 14, 2021

2.     Binance was founded in July/2017

3.     Coinbase is the largest crypto exchange in the U.S.

4.     Binance is the largest crypto exchange in the world

5.     Binance's platform is easy to use, but the sheer number of choices can overwhelm a new user. Binance is a better fit for people familiar with cryptocurrency lingo and investing options

6.     Coinbase is designed for convenient, easy trading 

7.     Both exchanges provide mobile apps with varying functionalities

8.     A recent survey by the Pew Research Center found that 63% of Americans believe that cryptocurrency is a risky investment

9.     The CFTC has fined cryptocurrency exchanges a total of $1.3 billion for violations of anti-money laundering regulations.

What can we learn from this story? What’s the take away
 
It is important to note that the cases against Coinbase, Binance, and FTX are still ongoing. It is possible that the companies will be found not guilty of any wrongdoing. However, the fact that these cases are being brought at all is a sign that regulators are taking a closer look at the cryptocurrency industry. 

Perhaps the crypto industry, referenced as the Wild West by Gary Gensler, could be coming to an end or face some hard fast rules of having to follow the rules of regular finance if they wish to exist.

Well, there you go, my friends; that's life, I swear

For further information regarding the material covered in this episode, I invite you to visit my website, which you can find on either Apple Podcasts/iTunes or Google Podcasts, for show notes calling out key pieces of content mentioned and the episode transcript.

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