U.S. regulators are taking digital currency exchanges by storm, suing the two largest digital currency exchanges, Binance and Coinbase, in less than 24 hours.
"Through 13 charges, we accuse Zhao and Binance entities of engaging in extensive deception, conflicts of interest, lack of disclosure, and a web of intent to evade the law." SEC Chairman Gary Gensler said in a statement about the prosecution.
Analysts believe that the SEC's move is an important gamble aimed at ending the ambiguous definition of digital virtual currencies in the past and bringing the industry under the federal securities regulatory system. If this goal is ultimately achieved, the entire virtual currency industry will be reshaped under the regulatory framework.
Some digital currency industry insiders told Tencent News "Periscope" that Binance and Changpeng Zhao will be victims of this round of intensive actions, and the best outcome is similar to the previous thunderous FTX exchange, which was fined heavily, the founder was ruled accordingly, and Binance will be taken over.
But he is still optimistic about the long-term trend of the digital virtual currency industry in the future. "The overall coin price will fall deeply, and then rise steadily, with Bitcoin being the strongest." This person said.
According to Bloomberg, Coinbase chief lawyer Paul Grewal said it is willing to take its legal battle with the U.S. Securities and Exchange Commission (SEC) to the Supreme Court as government agencies expand their crackdown on tokens it considers listed securities. Paul Grewal said SEC enforcement actions could last months or even years.
Affected by the SEC lawsuit, Binance's platform stablecoin, Binance USD (BUSD), has a market capitalization of below the $5 billion mark on June 7. Historical data shows that the market value of BUSD has fallen by 50% in just about three months.
Data from data firm Nansen shows that investors have withdrawn $1.43 billion from the Binance platform in a single day.
The SEC accused Binance of manipulating transactions and misusing customer funds
"Dude, in America, we're like a damn unlicensed stock exchange."
This is a sentence quoted in the SEC's indictment against Binance on June 5, US time, which was quoted by Binance's chief compliance officer in 2018.
On the same day, the US SEC launched a civil lawsuit against Binance, alleging that the exchange illegally carried out trading platform business in the United States and used users' funds improperly.
The SEC lawsuit also named Changpeng Zhao, Binance's founder and CEO, as a defendant. The SEC alleges that Binance and Changpeng Zhao misused customer funds and transferred them to Sigma Chain, a trading entity controlled by Zhao.
The SEC alleges that the trading firm conducted manipulative transactions that made Binance's trading volume appear larger than it actually was, while Binance also concealed the fact that it mixed billions of dollars in customer assets and sent it to Merit Peak, a third-party agency owned by Changpeng Zhao. The SEC launched an investigation last year into possible links between U.S. affiliates created in 2019 and Sigma Chain and Merit Peak Binance.US.
"This will be a landmark case." Kurt Gottschall, a partner at Haynes and Boone and former head of the SEC's Denver office, said, "The SEC seems to be very concerned about the mixing of client funds. ”
As the largest cryptocurrency exchange, Binance has never left the radar range of the most concentrated U.S. regulators. In late 2020, the SEC and DOJ issued subpoenas to Binance's U.S. branch. Against the backdrop of the bankruptcy of several cryptocurrency companies, including Binance's biggest competitor, FTX, the SEC has stepped up enforcement efforts over the past year.
In addition to the SEC, there are more regulators that are targeting Binance. The U.S. Commodity Futures Trading Commission (CFTC) claimed in March that Binance and Changpeng Zhao evaded the agency's rules, which cover trading platforms that offer derivatives to U.S. traders. In addition, according to people familiar with the matter, Binance is also facing a money laundering investigation by the US Department of Justice.
Less than 24 hours after filing the indictment, the SEC filed an emergency asset freeze order with lightning speed, asking the court to immediately freeze Binance's assets in the United States.
Typically, the threshold for emergency freezing of assets and receivership is high, and regulators must prove to the court that they have a high probability of success in the following case, and that potential losses that investors may face can only be avoided if emergency measures are taken.
The SEC clearly came prepared. In an accompanying 67-page supporting document, the SEC details its reasons for applying to court to urgently freeze Binance's assets in the United States.
"The U.S. Securities and Exchange Commission (SEC) has just filed a lawsuit with serious allegations that the defendants have been providing illegal crypto-asset securities trading platforms and unregistered brokerage and settlement services to U.S. investors for years," the SEC said. The defendants knew that their actions against U.S. investors were illegal and risked U.S. government enforcement actions, but Changpeng Zhao and Binance did not stop the illegal activities, on the contrary, their actions continued unabated. ”
Binance was founded in 2017 and quickly became a giant in the cryptocurrency space. According to data provider CCData, as of last month, more than 40% of cryptocurrency trading took place on the exchange. At one point, Binance controlled more than two-thirds of cryptocurrency transactions.
Two lawsuits, but the charges against Binance are more serious
On the same day that the SEC launched a fierce offensive against Binance, the SEC also launched a lawsuit against another digital currency exchange, Coinbase.
In a 101-page indictment, the SEC alleges that since 2019, Coinbase has illegally facilitated billions of dollars in digital currency securities trading, and that Coinbase has acted as a traditional exchange, intermediary and clearing agency, but has not registered any of its businesses as required by law.
Although the two major digital currency exchanges, Binance and Coinbase, were hit hard by regulation at almost the same time, there are very clear differences between the two lawsuits.
John Reed Stark, a Duke University Law School Chair Fellow and former head of the SEC's Cyber Enforcement Division, commented that the charges against Coinbase are not surprising and that the allegations against Coinbase do not involve fraud or founder Brian Armstrong personally than Binance, while for Binance, the allegations are more serious, involving fraud and Changpeng Zhao himself.
After receiving the legal action, both Binance and Coinbase said they would aggressively defend themselves. Binance has denied allegations that users' assets on the U.S. business platform are at risk, and the company said it had recently been in settlement talks with the SEC, but regulators opted to file a lawsuit.
In an effort to stabilize confidence, Patrick Hillmann, Binance's head of strategy, said there were no significant outflows of user funds from Binance. Changpeng Zhao said: "Our team has been ready to ensure the stability of the system, including withdrawals and deposits. He was referring to the possibility that customers could withdraw their funds. According to CoinDesk, the value of BNB has fallen by more than 7% in the first 24 hours. Before the lawsuit news, it fell 2.5 percent.
"There are clear differences between the two lawsuits, but there is overlap, and the ultimate point is the same, which is that the SEC wants to bring the cryptocurrency industry under the federal securities law regulatory framework." Kevin O'Brien, a former U.S. federal prosecutor and partner at law firm Ford O'Brien Landy, said.
Purpose of the SEC: To bring virtual digital currencies into the regulatory framework
If Binance's statement that it has been in settlement negotiations with the SEC is true, then in the end, the SEC chose to sue directly, ignoring Binance's move to reach a settlement, which is obviously that the SEC has greater ambitions, wants to achieve greater goals, and has full certainty.
Some analysts said that the high-profile lawsuit against the two exchanges by the SEC is actually an important bet for the SEC, which hopes to win and eventually be granted jurisdiction over the cryptocurrency industry.
Compared to other assets, such as commodities, securities are heavily regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 sets out the definition of "securities" but currently relies on the jurisprudence of two U.S. Supreme Courts to determine whether an investment product constitutes a security.
SEC Chairman Gary Gensler has long said that virtual currencies are securities and therefore need to be regulated by the SEC. In recent years, he has steadily and continuously exerted pressure on the crypto market, from initially focusing on token sales and crypto products with interest, to more recently, beginning a concentrated crackdown on unregistered cryptocurrency brokers, exchanges, and clearing activities.
Although a handful of crypto firms are licensed as an alternative system trading system, a type of trading platform that brokers use to trade listed securities, none of the crypto platforms currently operate as official stock exchanges.
In addition to Binance and Coinbase, the SEC filed lawsuits this year against Beaxy Digital and Bittrex Global, accusing them of failing to register as exchanges, clearing houses, and brokers.
Gensler previously said in an interview with CNBC: "The entire business model is based on not complying with U.S. securities laws, and we require them to comply." ”
But cryptocurrency companies counter that tokens do not meet the definition of securities, saying the SEC's rules are vague and that the SEC has exceeded its remit in trying to regulate them.
Still, many companies have stepped up their efforts on compliance, putting products on hold and expanding outside the U.S. to counter the ongoing crackdown.
Tens of billions of dollars net worth Zhao Changpeng, "fierce and less lucky"?
As a figure at the center of the vortex in this round of US regulatory storm operations, Changpeng Zhao still chose to deal with it head-on. On the day of the indictment, Changpeng Zhao, who has more than 8 million followers, launched a poll on his personal Twitter that said, "Who do you think protects you more?" ”。 As of June 6, US time, of the more than 310,000 total votes, nearly 85% chose Binance and only 15% chose the SEC.
The vote was a positive response to the SEC by Changpeng Zhao, mocking the SEC for protecting investors' interests, but in fact the majority of people are still on Binance's side.
According to real-time data from the Forbes Rich List, the 45-year-old Changpeng Zhao is currently worth $10.5 billion, ranking 167th in the world, and in 2022, Changpeng Zhao's net worth once reached $65 billion.
Last month, news broke that Changpeng Zhao was trying to reduce his stake in Binance US to help Binance US gain more regulatory convenience. Previously, Changpeng Zhao had been placed on the US Commodity Futures Trading Commission's list of lawsuits, and since he held a majority stake in Binance US, it was difficult to obtain the appropriate license from the regulator.
Changpeng Zhao's current situation is reminiscent of last year's FTX founder Sam Bankman-Fried. After the FTX thunderstorm, SBF was charged with fraud and misappropriation of client funds, and if all 8 charges are established, he faces up to 115 years in prison. After paying up to $250 million in bail late last year, SBF is now living in his parents' home and is still preparing his case for defense.
According to the SEC indictment, Binance and Changpeng Zhao currently face 13 charges and could move on to a lengthy legal battle. A person in the virtual currency industry believes that Changpeng Zhao is already in a bad situation, and the SEC is obviously prepared, and only after having sufficient evidence will it file a lawsuit in one fell swoop, in order to win a big victory, and in the end, Changpeng Zhao is likely to face a similar outcome to SBF.
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