Last week — in separate actions over the course of 48 hours — the US Securities and Exchange Commission (SEC) filed lawsuits against crypto asset platform operators Binance (including related entities and founder Changpeng Zhao), and Coinbase (including its parent company), alleging that the entities violated federal securities laws by offering and selling unregistered securities; failing to properly register as securities exchanges, broker-dealers, and clearing agencies; and, particularly in the case of Binance, by engaging in fraudulent and deceptive practices.

Unregistered Exchange, Broker, and Clearing Agency

In complaints both exceeding 100 pages, the SEC alleged that Binance^[1] and Coinbase^[2] intentionally evaded the conflict-of-interest mitigation requirements under the Securities Act by combining core securities market functions, intertwining the traditional services of an exchange, broker, and clearing agency, without registering those functions with the SEC as required by law.

After emphasizing that under the Exchange Act the SEC need only establish that unlawful activity relating to a single crypto asset deemed a security occurred, the SEC alleged such activity from Coinbase in connection with at least 13 crypto assets, including via Coinbase’s Platform, Prime, and Wallet services. The SEC alleged similar activity from Binance in connection with at least 10 crypto assets. These crypto assets were allegedly offered and sold as investment contracts and thus as securities under the Howey test.

Notably, in framing the crypto assets as securities, the SEC pointed to particular control and/or other scarcity-affecting mechanisms implemented in connection with the crypto assets and, in applicable cases, the deflationary effect of burning tokens. The SEC further alleged that Coinbase was and remains aware of the risks inherent in trading and selling unregistered securities, performed a risk assessment, and ultimately decided to sell and trade despite the potential pitfalls.

As alleged by the SEC, the failure to properly register allowed Binance and Coinbase to transfer, commingle, and divert investors’ crypto and fiat assets, thereby risking the safety of billions of dollars of US investor capital.

Unregistered Offer and Sale of Crypto Assets

The SEC claims that Coinbase unlawfully offered and sold unregistered securities via its crypto asset "Stalking Program," which includes five crypto assets: Ethereum, Algorand, Cosmos, Tezos, and Cardano. The Staking Program purportedly allows investors to earn financial returns or “rewards,” but the SEC alleged that the program offers additional features that differentiate it from what investors would be able to do by staking and earning rewards on their own. As alleged, it is only through Coinbase’s managerial efforts, pooling of assets, and expertise with respect to certain blockchain protocols, that investors would be rewarded or otherwise turn a profit.

With respect to Binance, the SEC claims that Binance’s offer and sale of certain crypto assets, including Binance’s own crypto assets — BNB and Binance USD — along with profit generating programs called “BNB Vault” and “Simple Earn,” and a purported “staking” scheme, none of which were registered with the SEC, all violated securities laws.

Fraud and Deceptive Practices

The SEC also alleged that since its inception in 2019, Binance has engaged in various schemes in the offer and sales of securities to mislead and defraud investors, including by evading its registration requirements and failing to implement surveillance and other controls to prevent fraud and manipulative acts on the Binance.US Platform and to restrict US customers from accessing Binance.com.

Next Steps

Now more than ever, the SEC is committed to cracking down on the digital asset industry, while also facing pressure from the industry and the courts to provide further clarification on the regulatory framework for crypto assets.

Recently introduced legislation, including the Securities Clarity Act and the release of a discussion draft from the US House Financial Services Committee chair, as well as US House Committee on Agriculture legislation designed to implement a digital asset statutory framework, if passed, would potentially clarify when digital assets such as cryptocurrencies should be considered securities.

Our team will be monitoring the Binance and Coinbase cases as both unfold, as well as pending legislation.

[1] SEC v. Binance Holdings Limited et al., No. 1:23-cv-01599 (D.D.C.), Complaint filed June 5, 2023.

[2] SEC v. Coinbase, Inc. et al., No. 1:23-cv-04738 (S.D.N.Y.), Complaint filed June 6, 2023.