SEC Sues Binance And Coinbase In Latest Crypto Crackdown

Agency actions could give industry its day in court while Congressional Republicans propose a regulatory framework for digital assets

Photo Taken In Germany, Berlin

Compiled by the Oliver Wyman Forum

The US Securities and Exchange Commission (SEC) launched arguably its biggest crypto enforcement actions to date by suing Binance Holdings, the world’s largest crypto exchange, and Coinbase, the largest US-based crypto exchange, for alleged violations of securities laws. While the cases have the potential to allow federal courts to effectively settle key regulatory issues, Republicans in Congress proposed a comprehensive framework of crypto regulation that would give a larger oversight role to the Commodity Futures Trading Commission (CFTC). These are among the notable recent developments in the future of money.

Legal Briefs

SEC Sues Binance And Coinbase Over Alleged US Securities Violations

The US Securities and Exchange Commission (SEC) stepped up its crackdown on unregistered cryptocurrency activities by suing Binance Holdings, the world’s largest crypto exchange, and Coinbase Global, the largest US exchange, alleging they violated a variety of US securities laws.

The lawsuits, filed on June 5 and June 6, respectively, did not come as a surprise. In March, the US Commodity Futures Trading Commission (CFTC) sued Binance for allegedly evading its rules while Coinbase said the SEC had informed the company it might take enforcement action. The two cases could be decisive for the future of cryptocurrency activity in the United States. The SEC and its chair, Gary Gensler, have argued that existing securities laws apply to crypto activities while industry executives contend that crypto’s distinctive characteristics require new rules and legislation.

Coinbase Chief Executive Brian Armstrong welcomed the chance to make the company’s case in court, writing in a tweet, “we're proud to represent the industry in court to finally get some clarity around crypto rules.”

The SEC filed a civil lawsuit against Binance Holdings, US-based affiliate BAM Trading Services, and founder Changpeng Zhao. It claimed that Binance and BAM operated unregistered national securities exchanges, broker-dealers, and clearing agencies; that Binance and Zhao secretly allowed high-value US customers to trade on while claiming they were prohibited; and that Binance and BAM sold Binance’s BNB coin, stablecoin Binance USD, and various crypto lending and staking products without registering them with the SEC.

The agency’s suit against Coinbase Global alleged that the company combined the services of an exchange, broker, and clearing agency without having registered with the agency to conduct any of those activities. It also charged that Coinbase had failed to register the offer and sale of its staking-as-a-service program.

Shares in Nasdaq-listed Coinbase fell more than 10% on June 6. The price of bitcoin, which fell by about $1,100, or 4%, on June 5 in the wake of the Binance lawsuit, recovered most of that ground on June 6.

Policy Front

Republican Bill Proposes Bigger Crypto Role For CFTC

Republican leaders in the US House of Representatives on June 2, proposed draft legislation that would establish a clear regulatory framework for cryptocurrencies and digital assets, and give the Commodity Futures Trading Commission (CFTC) significant authority over the market.

Under a draft bill introduced by Republicans Patrick McHenry, chair of the House Financial Services Committee, and Glenn Thompson, chair of the Agriculture Committee, cryptocurrencies offered as part of an investment contract would be regulated by the Securities and Exchange Commission (SEC) while the CFTC, generally viewed more favorably by the industry, would regulate cryptos that qualify as commodities. The question of whether a digital asset is a commodity would depend largely on whether its blockchain is decentralized, which would require that no person during the preceding 12 months had unilateral authority to control or alter the network and that no token issuer or affiliated person owned 20% or more of the digital assets outstanding.

The bill was intended as a starting point for discussions with Democrats on the two committees. It is far from clear that the proposal can win approval from the entire House, or the Democratic-controlled Senate. Yet some industry executives expressed optimism that the bill could provide useful legal clarity for the industry. The proposal “lays a strong foundation for regulatory jurisdictions and definitions,” Paul Grewal, chief legal officer of crypto exchange Coinbase, said in a tweet.

ECB Says Reports Confirm Feasibility Of A Digital Euro

The European Central Bank (ECB) on May 26 released two reports that confirmed the feasibility of launching a digital euro, or central bank digital currency (CBDC).

A market research report indicated there is a sufficiently large pool of European providers capable of developing digital euro solutions and that different types of architectural and design options were available. A separate report on a prototyping exercise found that multiple user interfaces could be integrated successfully into the euro’s settlement system. It remains unclear whether existing technology could handle offline transactions with a digital euro in the short to medium term.

The European Commission is expected to propose legislation for a digital euro this year and the ECB plans to decide in the autumn whether to proceed with development and testing.

CBDCs Should Allow Wide Participation By Stakeholders, BIS Says

Central banks considering issuing a central bank digital currency, or CBDC, should allow a wide range of public and private stakeholders to participate in the currency and develop services that benefit end users, the Bank for International Settlement (BIS) said in a joint report with seven major central banks.

“Private innovation is seen as an important factor for the long-term success of any CBDC,” said the report, published by the BIS and the central banks of Canada, the euro area, Japan, Sweden, Switzerland, the United Kingdom, and the United States. Consultation with a wide range of stakeholders can help central banks understand the potential benefits of various CBDC business models, including incentives for participants and value added to end users, and inform decisions about CBDC designs and functionality.

Key issues include how a CBDC would connect with alternative instant payments infrastructure and how CBDC transactions could be processed at the point of sale. International standardization could be very beneficial in supporting the development of a CBDC ecosystem, the report added.

UK Parliamentarians Urge Quick Action On Crypto Framework

The UK is well placed to play a leading role in the development of global cryptocurrency and digital asset markets provided the government develops a clear regulatory framework in the next 12 to 18 months, the All Party Parliamentary Group for Crypto and Digital Assets said in a report released on June 5. 

The growth in digital assets suggests they are here to stay but it “needs to be regulated to protect consumers and to ensure guardrails for investment and economic growth,” it said. The report expressed support for the UK Treasury’s strategy of regulating digital assets with existing financial rules as much as possible but recommended the appointment of a “Crypto Tsar” to ensure coordination across government departments.

Business Developments

Tether Plans To Mine Bitcoin In Uruguay

Stablecoin issuer Tether said it has invested it two renewable energy and bitcoin mining projects in Latin America as part of a plan to become a leader in sustainable bitcoin mining.

On June 5, the company said it had participated in the first round of financing for a billion-dollar wind and solar power project in El Salvador to power a bitcoin mining farm. On May 30, Tether said it was investing in a sustainable bitcoin mining project in Uruguay with a local company. It did not provide any further details.

Worldcoin Raises $115 Million To Scale Identity Protocol

Worldcoin, an open-source digital identity protocol developed by a startup chaired by OpenAI Chief Executive Sam Altman, has raised $115 million from investors who envisage the protocol serving as the CAPTCHA of the crypto economy.

Worldcoin uses an iris scanner to provide what it says is proof of an individual’s personal identity in a privacy-preserving manner. Blockchain Capital, the venture firm that announced the financing on May 24, said the protocol could enable over a billion people to participate in the crypto economy as well as providing a providing a way to distinguish people from artificial intelligence (AI) bots.