#74 The Context: How Media Covered the Binance & Coinbase Bombshells
Will the lawsuits be ‘fatal’ to crypto in the US?
What a week. Let’s begin by dispensing with some common sense (though you’ll have to go elsewhere for legal advice): If you’re the chief compliance officer of a crypto exchange, it’s probably not a good idea to write “we are operating as a fking unlicensed securities exchange in the USA bro.” As we saw this week, the SEC can find that statement and, four years later, put it in a lawsuit alleging your employer is, in fact, operating as an unlicensed securities exchange.
The usual disclaimer: This newsletter collates the main themes and headlines of the week in DeFi/crypto/metaverse/Web3/NFT land and tries to provide unbiased context. It's aimed at anyone who wants to keep an eye on the space. It's put together by a team at YAP and doesn't contain any promotion of our clients (if one is mentioned, we'll flag that).
[tl;dr]
On Monday, the SEC sued global crypto exchange Binance.
On Tuesday, the agency sued US-based exchange Coinbase.
Both lawsuits assert that Solana, Polygon, and other assets traded on those exchanges are securities.
[The SEC Sues Binance]
On Monday, the U.S. Securities and Exchange Commission lobbed 13 charges against Binance, its US affiliate BAM Trading, and CEO Changpeng Zhao (CZ). It asked a District Court judge to freeze the company’s assets and put it in receivership.
What the SEC Said:
In a 136-page filing, the agency accused the defendants of setting up an unregistered exchange, selling unregistered securities, commingling customer funds with company assets, soliciting US residents to buy and sell those securities, and even engaging in price manipulation tactics such as wash trading. Perhaps even worse, SEC Chair Gary Gensler suggests it’s intentional rather than a result of opaque regulations: “We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law.”
What Binance Said:
Why won’t you ever return our calls, SEC? This lawsuit is just the latest example of the SEC using “enforcement and litigation rather than the thoughtful, nuanced approach demanded by this dynamic and complex technology,” Binance responded in a written statement.
What Reporters Said:
The lawsuit was The Wall Street Journal’s top story Monday; the publication wrote that the SEC’s request for receivership is typically reserved for fraud cases “such as Ponzi schemes” or when “regulators don’t trust management to run a company in compliance with the law.”
The SEC came with receipts, noted Joanna Wright of DLNews, using CZ’s “micromanagement” of BAM Trading business expenses, including Binance sweatshirts, to make the case that CZ was pulling the strings of the ostensibly independent Binance.US.
According to Bloomberg, it’s just the “latest legal headache” for the exchange, which is already being sued by the Commodity Futures Trading Commission. But maybe not the last headache, wrote Fortune editor, Jeff Roberts, citing sources who believe the Justice Department will soon announce criminal charges against Binance.
What Columnists Said:
“I am tempted to read yesterday’s lawsuit as kind of an endorsement of Binance by the SEC,” joked Bloomberg’s Matt Levine. “The SEC, and before it the CFTC, investigated Binance carefully and wrote a 136-page complaint about every bad thing it could find, and all it could find is that Binance is running a crypto exchange.”
Actually, some of this looks like genuine bad behavior, countered CoinDesk’s David Z. Morris. “But it’s hard to escape the sense that they are being framed as a do-over for the SEC’s and Gensler’s FTX missteps.”
[The SEC Sues Coinbase]
The SEC wasn’t done. On Tuesday, it filed suit against Coinbase and Coinbase Global (but no executives).
What the SEC Said:
The agency opened its 101-page lawsuit by accusing the US company of merging the functions of a securities broker, exchange, and clearing agency without registering as any of them. The SEC added that Coinbase has been selling securities via its staking-as-a-service program.
What Coinbase Said 💬:
Why’d you approve our IPO if we were out of compliance? CEO Brian Armstrong echoed the rebuttal made by Binance while noting that the SEC complaint revolves around whether certain listed assets are securities — something “the SEC and CFTC have made conflicting statements” about. Armstrong vowed to “represent the industry in court to finally get some clarity around crypto rules.”
What Reporters Said 🧑💻:
This is gearing up to be an epic showdown, wrote CoinDesk’s Jesse Hamilton, with the SEC “finally establishing its legal argument against the industry and setting up the future court fights that could decide everything.”
Yeah, this wasn’t a surprise, wrote Yogita Khatri at The Block, given the Wells Notice Coinbase received in March.
Moreover, Coinbase isn’t taking it sitting down. Its public petition asking for the SEC to clarify rulemaking is moving forward in the US Court of Appeals, reported Nivesh Rustgi for Decrypt. That court just gave the SEC until June 13 to respond.
What Columnists Said:
This is really about the SEC atoning for its screwup on FTX, said CoinDesk’s David Z. Morris. Determined not to be burned again, the agency is suing based on “the moral presumption that cryptocurrency is inherently fraudulent and valueless.”
Yup, and it could take down the industry in the US as a result, wrote CoinDesk’s Daniel Kuhn. “By going after the two biggest fish in crypto, it’s becoming clear that all exchanges are at risk. Scratch any financial firm and you’ll find it bleeds financial infractions, especially in an industry as rough-and-tumble as crypto.”
The SEC suit could indeed be an existential threat to Coinbase, argued lawyer Preston Byrne, writing for CoinDesk: “If they can get one of the tokens to stick and win at trial, they may be able to shut down Coinbase’s core business completely.” But Byrne also sees a compromise emerging between the government and the industry within the next five years.
[Token Projects Implicated]
The Binance and Coinbase suits both allege that the companies are facilitating the trading of securities, which is why they should have registered as securities exchanges. The Binance suit singles out Binance’s BNB and BUSD tokens as securities, as well as Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), Cosmos (ATOM), Sandbox (SAND), Decentraland (MANA), Algorand (ALGO), Axie Infinity (AXS), and Coti (COTI). It also contends that it lists other assets that have been labeled as securities via SEC enforcement actions, including AMP, REP, UST, and TRX. The Coinbase complaint includes many of those, as well as Chiliz (CHZ), Flow (FLOW), Internet Computer (ICP), NEAR (NEAR), Voyager (VGX), Dash (DASH), and Nexo (NEXO).
What Reporters Said 🔎:
Bloomberg’s Yueqi Yang ran the numbers and calculated that “the list of digital tokens deemed as unregistered securities by the Securities and Exchange Commission now spans over $120 billion” in market cap. Now, Coinbase and Binance must decide whether to delist those tokens.
One asset that wasn’t mentioned? USDC. As Fortune’s Leo Schwartz noted, the stablecoin, created by Coinbase and Circle, avoided the fate of Binance’s BUSD.
What Columnists Said:
This is a bit suspicious, reasoned Blockworks’ David Canellis, because it’s hard to find a pattern that links these assets, aside from their order on Coinbase’s website. “Did the SEC just label everything on Coinbase’s front page a security?”
Well, “the SEC has made clear that it sees virtually every crypto asset with the exception of bitcoin as a security,” wrote Steven Ehrlich at Forbes.
This may be why this approach makes sense, as opposed to dozens of individual lawsuits, suggested Protos. “Attacking the marketplaces where the assets are traded is simply a more effective way to ensure those assets struggle to trade any longer.”
“The elephant in the room is Ethereum,” wrote Bloomberg’s Levine, noting that it “entirely fits the SEC’s description of Solana, Cardano, etc,” but may get a pass for “historical reasons.”
Samantha Yap’s Take: “It has been interesting to read the court filings against Binance and Coinbase and observe how the SEC has made an assessment of why the tokens stated are identified as securities. The SEC has been closely examining various communication channels like websites, blogs, and social media posts for evidence. This indicates just how important communication and messaging are in the space. It’s a lesson for companies and individuals to think through what they tweet and post on their social platforms carefully and the importance of having a communication strategy.”
[Tweet of the week]
[Money & Crypto Regulation – The never-ending battle for clarity]
In this instalment of YAP Cast: The Story of Money Season 3, Samantha Yap interviews Nikhilesh De, Managing Editor for Global Policy and Regulation at CoinDesk. He has been covering the world of crypto since 2017, providing a unique perspective on the industry's ups and downs. This episode sheds light on the differences between financial regulation and regulating crypto. Listen to the first episode of YAP Cast: The Story of Money here.
[Events]
ETHPrague | 9th - 11th June 2023 | Prague, Czech Republic
Epic Web3 Conference | 9th June 2023 | Lisbon, Portugal
FANS LOVE IT! Web3 Football and Sports Conference | 10th June 2023 | Istanbul, Turkey
Dutch Blockchain Days | 14th June 2023 | Amsterdam, Netherlands
Non Fungible Tokyo | 22nd June 2023 | Tokyo, Japan
ETHGlobal Waterloo | 23rd - 25th June 2023 | Waterloo, Canada
Solana Hacker House | 25th - 29th June 2023 | Tel Aviv, Isreal
IVS Crypto 2023 Kyoto | 28th - 30th June 2023 | Kyoto, Japan
Blockchance 2023 | 28th - 30th June 2023 | Hamburg, Germany
[TradFi Translations]
An occasional segment exploring one particular aspect of TradFi.
This week: “The Howey Test” by Sam O’Donohoe.
The Howey Test is a legal assessment used by the US government to determine whether an asset qualifies as a security under federal securities laws. Its name derives from the landmark 1946 US Supreme Court case, SEC v. W.J. Howey Co.
The test is made up of a four-pronged framework that focuses on the economic realities of a transaction rather than its form:
Investment of Money: There must be an investment of money or other valuable consideration.
Common Enterprise: The investment must be made in a common enterprise where investors pool their funds or rely on the efforts of others.
Expectation of Profit: Investors should have a reasonable expectation of earning profits from their investment, primarily resulting from the efforts of others.
Dependence on Promoter or Third Party: The success or failure of the investment must depend predominantly on the efforts of a promoter or a third party.
If a transaction satisfies all four elements of the Howey Test, it is deemed a security and is subject to the regulations of the SEC. This means that issuers of securities assets must comply with registration requirements and provide necessary disclosures to protect investors.
With the novel emergence of cryptocurrencies in the last 15 years, digital assets remain ambiguously classified by the SEC. This provides regulatory uncertainty for American exchanges and investors. As of the time of writing, Bitcoin and Ethereum are [viewed](https://www.businessinsider.com/personal-finance/howey-test?r=US&IR=T#does-crypto-pass-the-howey-test?) as commodities by the SEC.
The team: founder Samantha Yap and consulting editor Jeff Benson, Sam O'Donohoe, Andrew Wickerson, Tiffany Mac Sherry, Becky Corbel and Delon Chan. Your feedback is, as always, welcome. Ping us at thecontext@yapglobal.com. Old newsletters can be found here.
This newsletter is prepared by YAP Global, an international P.R. Consultancy focusing on helping cryptocurrency, Decentralised Finance (DeFi) and Web3 brands through impactful storytelling. Find out more about us here.