The Securities and Exchange Commission alleged in separate complaints this week that Binance and Coinbase, two cryptocurrency trading platforms, operate as unregistered securities exchanges, broker/dealers and clearing agencies.

In 2022, institutional investors in the U.S., Canada and Singapore disclosed exposures—and some significant write-downs—when cryptocurrency platform FTX collapsed into bankruptcy after a sale to Binance fell through. It is unclear what impact enforcement actions against these trading platforms will have on investors or on the market for digital assets.

The legal complaint against Coinbase was brought on June 6 in U.S. District Court for the Southern District of New York. It alleges that Coinbase made billions by unlawfully selling cryptocurrency securities and seeks an injunction, as well as civil fines and the return of dishonest profits.

In the complaint, the SEC charges that due to Coinbase’s failure to register under any of the functions the company performed, it was not subject to important examination and recordkeeping requirements designed to protect investors.

The complaint against Binance, the largest crypto trading platform in the world, is broadly similar: It operated as an unregistered exchange, broker and clearing agency. The SEC, in a case filed June 5 in U.S. District Court for the District of Columbia, alleges that Binance pretended not to serve U.S. investors so it would not have to register in the U.S., but in reality it served high-value U.S. clients for cryptocurrency trading.

In both complaints, the SEC took care to say that the digital assets listed on both platforms are indeed securities under U.S. securities laws and the Howey Test, which originates from the Supreme Court case SEC v. W.J. Howey and is used to determine whether something is a security or a commodity.

Paul Grewal, the chief legal officer at Coinbase, testified on cryptocurrency issues to the House Committee on Agriculture on June 6. The Agriculture Committee has jurisdiction over the federal commodities regulator, the Commodity Futures Trading Commission. Some in Congress and in the digital finance industry have said it is unclear whether the SEC or CFTC has jurisdiction over digital assets. Republican members of the House Financial Services and House Committee on Agriculture committees circulated a draft bill they say would offer “a functional [regulatory] framework that works for both market participants and consumers.”

The SEC alleges that Binance earned $11.6 billion since July 2017 as an unregistered exchange and that Binance’s chief compliance officer knew it was unregistered and acknowledged in a text message to a colleague: “[W]e are operating as a fking [sic] unlicensed securities exchange in the USA bro.”

Binance responded to the complaint in a statement: “Unfortunately, the SEC’s refusal to productively engage with us is just another example of the commission’s misguided and conscious refusal to provide much-needed clarity and guidance to the digital asset industry.” The remark is likely intended to invoke the alleged regulatory ambiguity about the legal status of crypto and whether it is a security or a commodity.

This criticism that the SEC should provide guidance and/or rulemaking on cryptocurrency is one SEC Chairman Gary Gensler has addressed in public multiple times. His response has been consistent: The securities laws are adequate, and cryptocurrency is an industry that must be brought into compliance. No new rules are needed to clarify that the law must be followed or that digital assets are securities, Gensler has said repeatedly.

Tags: Crypto assets, SEC