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On Monday, it became known that the U.S. Securities and Exchange Commission (SEC) sued Binance and its founder and CEO Changpeng “CZ” Zhao. Due to it being a case of a government agency notorious in the crypto circles going against a significant if controversial market player, this event broke headlines immediately. Now that the dust has more or less settled, let’s unpack why the SEC is suing Binance and CZ and whether it can shake the crypto market.
Claims and Charges
The news broke when the U.S. SEC published a press release on July 5, 2023. The full complaint is a whopping 136 pages, detailing the claims charged by the agency:
- Operating unregistered exchange, broker, and clearing agencies, concerning Binance.com, Binance.US, and CZ-operated investment funds;
- Unregistered offer and sale of crypto assets, concerning staking programs;
- Not only failure to restrict US investors from accessing Binance.com, but the agency claims the executives assisted their clients in circumventing the restrictions;
- Misleading investors in providing factual information on the market state and volumes, as well as concerning the corporate structure of the involved entities.
It should be noted that the complaint specifies the lawsuit as civil, so no criminal charges have been levied yet. The agency intends to prevent the mentioned parties from continuing operations, as well as seeks substantial fines and reimbursement to investors.
So, those who side with Binance view the lawsuit as an attack on the whole crypto industry. There are a few reasons why they are concerned with the consequences of it.
The Larger Picture
Flashbacks to FTX
One of the major concerns in this situation is that the SEC claims make Binance look a lot like FTX. From off-shore registration to alleged commingling of funds within purportedly separated entities, it all paints an already familiar picture.
The complaint represents only one of the points of view, and the SEC reasonably expects to hear the accused defend themselves in court. It could be that the agency is searching for familiar clues and patterns, making the two exchanges look the same in the process. A more likely alternative, however, would be that Binance’s and the CZ-owned entities do work the same way FTX and Alameda did. One has to admit, in a more competent manner since they managed to stay afloat since 2018.
The parallels are chilling because, around the time FTX was presented with charges, it collapsed and brought down the entire crypto market with it. At the time, it was one of the most popular exchanges but not the number one. Today, Binance.com ranks first by trading volumes in almost all rankings. If this number one player were to go down, the impact would be even worse than that of the FTX crash.
The SEC is Coming for the Rest
The Zhao-run entities are not the only parties mentioned in the complaint. The document describes BNB and BUSD, which previously received a Wells notice, as unregistered securities. However, this is not the extent of it — SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI have also been labeled as such. The document also reminds the reader that in previous proceedings, AMP, REP, UST, and TRX have already been deemed unregistered securities.
All of these assets have been offered on Binance for staking but more importantly, share similar tokenomic details. These are proof-of-stake coins supported by identifiable legal entities, offered on the promise of returns from their efforts to grow the ecosystem or product. From the point of view of the SEC, this makes them investment contracts, which means the companies behind these assets can get similar complaints and charges in the future.
Even the players that try their best to comply with the SEC rules are not safe. Coinbase has just been served a similar complaint a mere day after Binance. In the case of this company, headquartered in the US, they are more likely to engage in a dialogue with the SEC to defend themselves in court. This filing also adds to the list of security tokens: CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO.
Clashing Views on Regulation
If we were to dive deeper into the political landscape of the US in connection with crypto, we could be here all day. Let’s briefly summarize this instead: for many US investors, crypto has been an exit from a system characterized by disproportionate wealth and power distribution. What they are seeing right now in this situation is the same power structures seeping into crypto (as if it did not reproduce them already).
The SEC’s approach to regulation “by enforcement” has been criticized for “stifling innovation” and “holding the US back” when it comes to digital assets. The agency is perceived as a power structure that is ridden with bureaucracy and corruption, influenced by the disillusionment with the entire establishment. On the other hand, the government maintains that its actions are in the best interest of American investors. Without its intervention, Mt. Gox and FTX happened, and millions of dollars of value have evaporated without a chance of being returned to the investors.
And so, the Crypto Twitter and skeptics exchange gotchas on Twitter, trying to accuse each other of hypocrisy. The video with the current Chairman of the SEC Gary Gensler giving lectures on cryptocurrencies and Algorand in 2021 is making rounds again. Binance’s Chief Compliance Officer’s quote from 2018 — the one that goes, “[w]e are operating as a f*ing unlicensed securities exchange in the USA bro” — is mentioned in every other thread.
Brace for Impact
The crypto market was not slow to react to the news. Within a few hours, the total crypto market capitalization lost 2.8% or almost $5 billion. Unsurprisingly, the assets that shed the most value are ones that were mentioned in the complaint: SAND (-15.20%), MANA (-14.64%), and AXS (-10.42%). BNB is down 6.75% in comparison to before the news. Even though no legal action has been taken yet, investors are already suffering losses.
In a message addressing the situation, Binance pledged to defend against the claims made by the SEC. This message presents a different point of view. They defect the blame by accusing the SEC of sensationalism and lament their decision to abandon the dialogue Binance allegedly tried to establish. As for whether they respond on the SEC’s terms remains to be seen.
Coinbase has not had ample time to prepare a response at the time of writing. Regardless, we can expect it to be in line with their previous rhetoric. The company also assumes a similar stance toward the SEC, claiming the regulator fails to provide regulatory clarity and undermines the interests of the U.S.
Could this spell trouble for the entire crypto industry? In the worst-case scenario, if Binance and Coinbase were to shut down, crypto would definitely have a hard time for a while. After all, these exchanges were a center of attraction for the crypto markets. However, so was Mt.Gox for Bitcoin trading pre-2014, and even the global hack and crash of the exchange did not kill crypto.
Fewer opportunities to buy crypto and trade it on a reputable platform would mean redistribution of trading volumes to the rest of the exchanges. Ironically, the SEC would be assisting in the decentralization of crypto markets. More crypto trading and purchases would go to unregulated markets and platforms, undermining the agency’s efforts to protect the investors.
Bottom Line
After a whole day, there is plenty of Twitter threads and articles summarizing the situation. What does the ChangeHero team have to add to the conversation? We believe that this is an earnest if desperate and poorly informed attempt to regain some control over the chaos of the crypto market. By now, Binance is used to dismissing everything as FUD and working under a looming threat of legal action. In magnitude, we would compare this event to the ban on mining in China — without a doubt, impactful but ultimately not fatal.
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