The Policy Pulse: June 12, 2023

Obviously the big news this week was the SEC’s back-to-back actions against Binance and Coinbase. In this week’s edition of the Policy Pulse, we’re going to focus on the SEC’s complaints and give a detailed breakdown of what is being alleged against the two largest cryptocurrency exchanges in the world.

Binance

On June 5th, the SEC charged Binance and Binance US (legally BAM Trading Services Inc.) with 13 offenses.

The charges alleged against Binance, if proven true, would be particularly serious, as they go beyond a failure to register with the SEC or the sale of unregistered securities. The SEC complaint also alleges that Binance co-mingled customer funds and manipulated trading volumes by using companies to wash trade.

Sigma Chain and Wash Trading

One of the most serious allegations against Binance was that it used an affiliated market maker, Sigma Chain, to perform “wash trading” which it used to artificially inflate trading volumes (and consequently “pump and “dump” the price of tokens on the Binance platform).

Sigma Chain is owned by CZ and according to the SEC, it was an active trader on the Binance.US Platform. The complaint mentions another CZ-owned entity, Merit Peak, which it also alleges traded frequently on the platform and to which customer funds were transferred.

Binance.US: A Sham Entity

It also alleges that Binance.US was essentially a sham entity that was in reality controlled by CZ and wasn’t actually separate from the rest of Binance. As well as this, certain high-value US individuals were allowed to trade on Binance.com.

Sale of Unregistered Securities

The SEC lists a number of cryptocurrencies that they allege were being sold as unregistered securities. It expressly lists SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI as securities.

Coinbase

Just one day after the Securities and Exchange Commission filed a complaint against Binance, the largest crypto exchange in the world, it filed charges against the second largest exchange, Coinbase.

The charges against Coinbase primarily relate to the failure to register with the SEC and offering unregistered securities. They are not quite as serious as the charges alleged against Binance.

Here is a breakdown of what the SEC alleges against Coinbase:

• The SEC claim that Coinbase operated its exchange without proper registrations as a national securities exchange, broker, and clearing agency.
• The SEC also alleges that Coinbase failed to register its crypto “staking-as-a-service” program.
• Coinbase is accused of facilitating the buying and selling of crypto securities without complying with the required regulations.
• The SEC claims that Coinbase combined the functions of an exchange, broker, and clearing agency without obtaining the necessary registrations, depriving investors of important protections.
• By operating without registration, the SEC claimed that Coinbase avoided its oversight, including inspections, recordkeeping requirements, and safeguards against conflicts of interest.
• The SEC’s complaint also holds Coinbase’s holding company, Coinbase Global Inc. (CGI), responsible for certain violations committed by Coinbase.
• Additionally, Coinbase is accused of conducting an unregistered securities offering through its staking-as-a-service program, which involved pooling customers’ stakeable crypto assets and distributing rewards.
• Coinbase’s alleged failure to register has deprived investors of crucial protections, including fraud prevention, proper disclosure, and routine inspections by the SEC.
• The SEC seeks injunctive relief, disgorgement of ill-gotten gains with interest, penalties, and other equitable relief through its complaint filed in the U.S. District Court for the Southern District of New York.
• Coinbase has been critical of the SEC’s approach to regulation and enforcement in the US. They recently filed a legal action against the SEC to provide more clarity for the cryptocurrency industry.

FCA’s Strict Rules on Crypto Promotions in the UK

In other news this week, the UK’s Financial Conduct Authority (FCA) published a statement announcing that they will implement “tough new rules” for crypto promotions from October 8th, 2023.

The new rules will apply to all firms marketing crypto to UK consumers, regardless of their location or the technology used for promotion.

Under the rules there will only be four ways to qualify to be legally able to promote cryptocurrencies in the UK:

• persons authorized by the FCA
• those approved by an authorized person
• registration with the FCA for anti-money laundering purposes
• or other exemptions.

MiCA Published in EU Journal

Last Friday, the Markets in Crypto Assets Regulation (MiCA) was published in the Official Journal of the European Union. The MiCA Regulation establishes comprehensive rules for cryptocurrencies in the EU, including a licensing regime and regulatory oversight framework for crypto firms.