In a stunning move, over the last two days, the Securities and Exchange Commission (“SEC”) has filed back-to-back enforcement actions against major crypto exchanges Binance (See https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf) and Coinbase (See https://www.sec.gov/litigation/complaints/2023/comp-pr2023-102.pdf . This clearly indicates that the SEC is flexing its enforcement power over both international exchanges as well as those exchanges with a focus on the United States.

 The substantive sections of both complaints show that the SEC’s legal theories used to attack the digital assets industry are changing, and new angles of attack are being explored.

For example, in Binance’s enforcement action, the charges revolve around Binance’s alleged active circumvention of United States securities laws, diversion of customer funds and wash trading by market maker affiliates of Binance, Sigma Chain and Merit Peak Ltd., supporting allegations of fraud. It is likely that these fraud allegations are a core basis for the SECs motion for a Temporary Restraining Order to (among other things) freeze all assets from Binance. (See https://storage.courtlistener.com/recap/gov.uscourts.dcd.256060/gov.uscourts.dcd.256060.4.1.pdf)

In addition to Binance’s alleged misdeeds, the SEC also claims that a host of digital assets, most of which had never been subject to any enforcement action, are securities. Moreover, with the exception of the Binance-issued instruments BNB and BUSD, none of the issuers of those digital assets alleged to be securities were named in the Complaint. This continues a disturbing trend starting with the enforcement action brought against the Wahi defendants, Bittrex and others. 

One interesting aspect of the SEC’s action identifies BUSD, Binance’s stablecoin, as a security, despite the fact that the Commodity Futures Trading Commission had already claimed stablecoins as a commodity under their jurisdiction. This claim continues the battle over regulating digital assets (See our article linked here). 

The substance of the Coinbase complaint is similar to the Binance complaint, in its allegations of trading unregistered securities and failure to register as a securities exchange, broker and clearing agency.  Importantly, however, it does not include allegations of fraud.

Like Binance, Coinbase is alleged to have allowed its users to buy and sell digital assets that, according to the SEC, are securities. This complaint delves more deeply into Coinbase’s Crypto Rating Council, which ranks crypto assets in terms of how many elements of the Howey test the asset satisfies. Accordingly, rather than allegations of skirting securities laws, the SEC now argues that Coinbase’s attempts to comply with  securities laws are evidence of illegal activities.

In addition to the SEC action, regulators in 10 states (Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin ) have also brought actions against Coinbase, some of which include cease and desist orders, or orders to show cause which demand imminent hearings .

These enforcement actions are among the most high profile and impact two of the largest and most important exchanges in the digital assets industry and as such are both “must read” filings. Our team of crypto / digital asset lawyers are preparing a more detailed analysis of these latest actions by the SEC.  In the meantime, feel free to contact us with your questions.