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Off Chain 6/8/23: The TL;DR of the SEC Complaints Against Binance & Coinbase
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In this week's episode, we do a deep dive into the SEC complaints against both Coinbase and Binance to summarise all the important information.
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Transcript
Introduction by Hosts
00:00:12
Speaker
Hello and welcome to the Decrypting Crypto Podcast. It's June 8th, 2023, and this is Off Chain, your weekly recap of the biggest stories in Web3. I'm Matthew Housebarbie, and as always, I'm here with Austin Knight. How you doing, Austin? Wow. What a wild week, Matt. We've been complaining about slow weeks for news. Our requests have been answered in a very big way. Yeah.
00:00:39
Speaker
Be careful what you wish for, right? Yeah, it has been a bit of
SEC Charges Against Binance
00:00:45
Speaker
a roller coaster. Everything's kind of come to the fore. We've been talking a lot about Binance over the previous episodes. Well,
00:00:51
Speaker
Yeah, this week has brought that to the fore and more. So we're gonna do a bit of an overview episode today of all of the SEC situations that have sprung up across finance, Coinbase, what that means for tokens that have been actually claimed to be securities by the SEC. So we're gonna dive in to all of that right now.
00:01:24
Speaker
So let's start with what happened on Monday. On Monday, the SEC filed 13 charges against Binance and a bunch of their related entities, as well as, I think most notably, the founder, Changpeng Zhao, CZ.
00:01:42
Speaker
So there's a lot to dig into here, and it's worth noting, you know, we already talked previously, Austin, about the lawsuit that came to them from the CFTC. But to kind of quote the SEC here,
00:01:59
Speaker
Through 13 charges, 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.
00:02:16
Speaker
Well, that doesn't sound good, right? Yeah, that is uh, yeah, it's it's it's pretty It's it's pretty damning the charges so there's a few things to pull out from it right at a high level in the SEC is kind of filing they
00:02:34
Speaker
that I'll kind of quote this right the SEC is charging Binance and BAM trading which is BAM trading which is Binance US with operating unregistered national securities exchanges broker dealers and clearing agencies
00:02:50
Speaker
Binance and BAM trading with the unregistered offer and sale of Binance's own crypto assets, including a so-called exchange token, BNB, and a so-called stablecoin, BinanceUSD. Certain crypto lending products and a staking as a service program.
00:03:10
Speaker
And they're also charging CZ as a control person for finances, BAM trading operation of unregistered national security exchanges, broker dealers, and clearing agencies.
Legal Implications for Binance
00:03:23
Speaker
So there's a lot in that. The first big piece is this piece around Binance being an unregistered exchange broker and clearing agency. So the SEC, they allege that, and with respect to binance.com, Binance should have registered as an exchange broker dealer and clearing agency. It's worth calling out at this point. There is no actual way for them to do that. So that's slightly difficult.
00:03:51
Speaker
Two, with respect to Binance US, Binance and BAM Trading, that they should have been registered as an exchange and as a clearing agency. And then BAM Trading should have registered as a broker dealer.
00:04:04
Speaker
The SEC is also, and I think this is the big difference between what we'll talk about with the Binance lawsuit and the Coinbase lawsuit, is that CZ is very much tied up in all of this. And in fact, one thing that happened two days ago, or was it Wednesday? I think, actually I think this was Tuesday. They also filed a restraining order on assets basically to stop
00:04:33
Speaker
CZ moving assets between entities he owns from Binance. So a lot more wrapped up in this on that side. Then we also have this, yeah, so sorry, go ahead, Austin.
00:04:45
Speaker
So to your point, Matt, the SEC actually mentioned CZ nearly 200 times in their 136 page complaint, which I thought was just very telling, you know, and they literally use phrasing like Zao's control, like sort of painting it as if it's, it's, you know, something he's directly responsible for. Whereas by comparison, when we get to the Coinbase.
00:05:09
Speaker
complain. Brian Armstrong, the CEO of Coinbase, has just mentioned once. So it really seems like in the Binance suit, they're not just going after Binance and their related entities, but they're going after CZ himself. Definitely. That is very apparent. And so we've got a couple of extra pieces on this where there was the talk of the unregistered offer and sale of crypto assets, most notably in the Binance one, BNB and BUSD. We'll talk about some more that were mentioned in a second.
00:05:39
Speaker
And then another big one that the SEC is kind of really charging Binance around is this failure to restrict US investors from accessing Binance.com. So they talk a lot about how
00:05:52
Speaker
There's no clear separation between Binance US and Binance means they're knowingly letting US customers trade on assets they shouldn't have access to or using products they shouldn't have access to. The majority of what I have just mentioned so far, along with this big kind of broad bucket of which they group as misleading investors, which I'll talk about in a second.
Customer Funds Misuse Allegations
00:06:15
Speaker
all start to feel very similar to the FTX complaints. This is, I would say, so much more similar to the FTX piece. And in particular, when we start getting up to the pieces around CZ and this around misleading investors. So I want to quote this.
00:06:37
Speaker
This is from the SEC complaint. Billions of US dollars of customer funds, this is from both Binance and Binance US, were commingled in an account held by a Zao controlled entity. The entity that they're talking about here is Merit Peak Limited. You're going to start hearing a lot about Merit Peak.
00:06:59
Speaker
Merit Peak is an entity that's actually owned by CZ. So I'll quote, the use of Merit Peak is an intermediary to transfer platform
00:07:09
Speaker
As an intermediary to transfer platform, customer money to buy BUSD presented an undisclosed counterparty risk for investors. What they're saying here is they're alleging that Binance transferred customer funds to Merit Peak Limited to buy their own stablecoin BUSD. Does that remind you of anything, Austin?
00:07:31
Speaker
very similar to allegations against FTX and SPF I think that literally in the complaint they said Binance moved around customers Fiat and crypto quote as defendants pleased so they're sort of painting this picture of like oh they're just sort of whimsically doing what they want
00:07:48
Speaker
with customer funds. And also that that phrasing under Zao's control, again, that is very, very pointed vocabulary that they're using there. With that said, I think it is important to mention that a distinction between what we're seeing with the Binance complaint and CZ being mentioned versus the FTX and SPF situation is that currently
00:08:14
Speaker
no criminal charges have been brought against Binance or CZ. Whereas obviously FTX and SPF in particular, I think he's facing upwards of like 13 or 15 criminal charges at this point. They just keep racking up. That's right. This is a purely civil case at this point at least. So yeah, it just really isn't sounding great on the Binance side. And so Merritt Peak,
00:08:40
Speaker
which banked with and held all of its funds at Silvergate. Rest in peace. They, as I quote, received as a pass-through account over $20 billion that included customer funds from both Binance platforms. Those funds were then sent to an unnamed trust company.
00:09:01
Speaker
In transfers that appear to relate to the purchase of BUSD. This is not good then we start to see what they're talking about with this kind of this web of I can't remember the exact Phrasing they use but it was a let me go back up to where I had this it's like an extensive web of deception You never really like to have your business Named described like that, but they said that so sigma chain
00:09:29
Speaker
which is another company that's mentioned a few times, which, like Merit Peak, is also owned by CZ, himself as an individual. The SEC claimed that a transfer of tens of billions of US dollars involving BAM trading, Binance US, Binance and related entities. So, you know, $160 million was transferred from a bank account belonging to Binance.US to a sigma chain bank account in 2021.
00:09:59
Speaker
That's very strange. And, you know, when you look at some of the quotes, lacking regulatory oversight, defendants were, as you mentioned earlier, Austin, free to do and did transfer investors, crypto and fiat assets as defendants pleased at times commingling and diverting them in ways that properly registered brokers, dealers, exchanges and clearing agencies would not have been able to do.
00:10:25
Speaker
They also just talk about this lack of separation, which they go into a lot. I think this was one of the things, I will say at this point, based on our previous discussions over the past couple of weeks, this doesn't surprise me a whole lot. What kind of did surprise me is when in the Binance complaint,
00:10:44
Speaker
the SEC explicitly called out 10 cryptocurrencies as being unregistered securities. So BNB, B-U-S-D, okay, I could maybe kind of see why they did that. Then they called out Solana, Cardano, Matic from Polygon, Atom from Cosmos, Sand from the Sandbox, Mana from Decentraland, AXS, which is X infinity, and COTI, which I actually don't know what COTI is, but
00:11:13
Speaker
Kind of random. The only thing that connects a lot of those is that they're all operating on proof of stake. Not sure what to read into that. But yeah, that's kind of where we got to. And then we had Tuesday, the Coinbase SEC filing.
SEC Charges Against Coinbase
00:11:30
Speaker
Yeah. So literally a day after the Binance announcement, the SEC filed suit against Coinbase alleging that they failed to register as an exchange clearinghouse and broker.
00:11:40
Speaker
Despite providing investors with these services and additionally They allege that coinbase was offering and selling unregistered securities via their staking service and that coinbase quote made available for trading crypto assets that are being offered and sold as investment contracts and thus as securities now you may recall that in March and
00:12:03
Speaker
Coinbase was served with a Wells notice. So again, this doesn't come as a major surprise, but the details of the complaint and their proposed outcomes or penalties
00:12:16
Speaker
That's where things start to get really wild. And I would say it's more severe than we were expecting in the case of Coinbase here. So just to quote the SEC here, they say, quote, Coinbase has elevated its interest in increasing its profits over investors interests and over compliance with the law and the regulatory framework that governs the securities markets.
00:12:38
Speaker
and was created to protect investors and the US capital markets. Coinbase should be, this is, here we go, Matt. Coinbase should be, quote, permanently restrained and enjoined and no longer able to do business in the United States. So that's, yeah, that's what they're asking for. So basically what this means is that Coinbase, at least in its current form and, you know,
00:13:05
Speaker
Its current form being like the majority of services that it's offering probably the stuff that you use and love Would no longer be able to do that type of business in the United States So this is a big one, you know, I mean I honestly
00:13:20
Speaker
I don't know about UMAP, but I didn't expect them to come after Coinbase in this way. As I have speculated previously, I thought, OK, they're complaining about Coinbase, and they have a Wells notice and everything like that. But Coinbase is ready to play ball. So it felt to me like Coinbase would be the last one that the SEC would come after, because they might be sort of like circle.
00:13:44
Speaker
an entity that they could establish a more formal relationship with to sort of manage and control crypto assets and exchanges in the United States, roll out CBDCs, whatever, what have you.
00:14:01
Speaker
This seems to indicate very differently that this is more so an attempt to just completely shut out crypto in the US. And I think Coinbase is acutely aware of that. Coinbase has responded in multiple ways.
00:14:19
Speaker
I think before we get into the response on this, I agree. What I think is a really important point on all of this is all we have heard from Coinbase is that they are happy to hear about and see more
Coinbase's Response to SEC
00:14:39
Speaker
regulation. They're happy to play ball with rules. There is a complete lack of rules. In fact,
00:14:44
Speaker
The core basis of the SEC's filing is asking them to do things and telling them they should have done things that they literally couldn't do if they tried. The regulation isn't there, the path forward from a SEC perspective.
00:15:02
Speaker
hasn't ever been there. I listened to the chief legal officer from Coinbase on the Bankless podcast a couple of days ago, the day that they got the SEC filing through to them. Yeah, the complaint, sorry.
00:15:22
Speaker
And that was kind of the narrative from them on the call. We've been trying to make contact with the SEC and Gary Gensler and actually like have productive conversations here that they do not seem in any way interested in doing that. And yeah, it's disappointing. But I guess Coinbase have just kind of rolled over and said, okay, fine, we give in. Is that right, Austin?
00:15:50
Speaker
Not quite. And I'm glad that they haven't because it really does feel very egregious and unfair to me after years, literally years we have been covering Coinbase saying we need more regulation. We need clear regulatory frameworks.
00:16:08
Speaker
Regulation through enforcement does not work. Just tell us what we need to do and we will do it. In fact, we will even work with you to create the regulatory framework. And as we have mentioned multiple times on this podcast, the only entity that ever got close to actually doing that was FTX, the most corrupt entity in this industry.
00:16:29
Speaker
And meanwhile, Coinbase, the one that has been trying to comply and trying to be a good actor, has been shut out by the SEC this entire time and now is facing enforcement action against them for regulations that they couldn't have complied with in the first place. So Coinbase has gone on to respond to this and said, quote, the SEC's reliance on an enforcement only approach
00:16:53
Speaker
in the absence of clear rules for the digital asset industry is hurting America's economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. They continue to say the solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation.
00:17:14
Speaker
In the meantime, we'll continue to operate our business as usual. So even in responding to the complaint that has been leveled against them, they're saying, we still want legislation. We want fair rules. It's just litigation isn't the right way to do it. And also, I think it's worth mentioning, Matt, that all of these complaints that are being brought against Coinbase, the SEC
00:17:43
Speaker
did have to approve Coinbase's operating model and business model via their IPO years ago. This is the crazy thing. It's not like this is a black box. This isn't FTX.
00:18:00
Speaker
The SEC has the information they need. I mean, we have public records. We have public filings continuously. There's so much more oversight that they're they're subject to. This is why it's so kind of strange, I think. And I think it's kind of interesting. And this is one of the big differences between Binance versus Coinbase, because it is so much more of a black box with Binance. What I what I really admire about what Coinbase has done, and you can see the
00:18:24
Speaker
the polarization in the approach being taken by Coinbase versus Binance. Coinbase has said, you know, okay, you want to say all these assets and securities? Well, actually, I had a poor girl, the chief, I think he's legal or compliance officer. He was kind of saying,
00:18:43
Speaker
you know, if the if the SEC deems all of these assets in their complaint as securities, that's fine. We want to be able to to actually like offer securities, we want to be registered as like, as a broker, it's like, you know, this, I thought that was interesting. And they also have said, they're not shutting down their staking. Binance on the other side have
00:19:07
Speaker
Basically, in Binance US, they have delisted all of the major trading pairs against all of the assets that were named by the SEC as securities. They've also completely paused that OTC desk in the US as well.
00:19:26
Speaker
You know, CZ may kind of put on a brave face on Twitter, tweet out four and say this is all fud, but they, I mean, he has also been personally, CZ has, kind of served to come to court on this, which he has said, yeah, it's fine. I don't even need to turn up in person. So I'll just do it remote or whatever. So, you know, I think it's just a different, completely different approach here. It really is. And it'll be interesting to see,
00:19:54
Speaker
you know, how those play out in both of these cases. Coinbase puts together a really nice quick like 40 second video response to this that just kind of goes through some of the numbers. And I'd like to just share them here because I think there's some compelling data in here. So it says, number of times we mentioned staking in our public S1 report, 57 times we've met with the SEC
00:20:22
Speaker
in 2022 asking for guidance. 30, percentage of assets we reject because they don't pass legal standards, 90%. The year the test was written that the SEC uses to determine if tokens are securities. 1946, what they're talking about here is the Howie test. We've covered this in previous episodes. Yeah, it's old, it's outdated, it doesn't make sense.
00:20:49
Speaker
tech jobs at risk of being driven offshore one million. I don't really know where they got that number, but I don't know. Yeah, the Coinbase is high on a lot of people or I can get what this the point that they're making here, which is a valid point is that, you know, hey, if you're going to create this regular regulation through enforcement approach in the US and basically just force
00:21:14
Speaker
all of crypto and crypto innovation outside of the US, then it's all going to go offshore. It's not just going to stop. You know, it's just that the innovation is going to happen elsewhere. And thus the jobs, the talent and the economic benefit is going to go elsewhere as well. So I think that that's kind of the point that they're trying to make there. But they continue in the video to say,
00:21:36
Speaker
Countries currently establishing comprehensive rules for crypto 33 So what they're saying here is like hey all these other countries are doing this and then they continue and this is my favorite Comprehensive rules that the SEC has established for crypto in America 0 and then the video ends and it says quote update the system
00:21:55
Speaker
So I thought it was I thought it was great. I thought it was great that they they released it basically on the day as well It's it's really great I am Kind of as a site engineer. I don't suppose you saw Gary Gensler
00:22:16
Speaker
um in his interview with Jim Cramer uh like he's been going on like a media tour right oh yeah the the crypto favorites right and um the he he kind of he was very direct in this like media tour he's been doing and he basically said and i'm
00:22:34
Speaker
I've not got the verbatim quote, but this is pretty close to it. Basically said, we have zero need for digital currencies or digital assets. We already have a digital dollar, yen, et cetera. Kind of like it's saying that these assets are already operating digitally.
00:22:57
Speaker
Well, I don't know whether he's kind of talking about, and I think a lot of people have been saying, oh, he's referring to like CBDCs, but I don't think he is. My take here is that he's kind of just talking about like internet banking and like you being able to do stuff digitally, which I think is absolute nonsense, like in that respect.
Market Reactions and Ripple's Status
00:23:17
Speaker
But he is, what he's made clear in this media tour is he is just firmly
00:23:22
Speaker
Anti-crypto there is no way about and he's not even trying to hide it and I think that is kind of like one of the big pieces in in all of this that is You know really damning. I think one of the things I found interesting
00:23:38
Speaker
was I was kind of bracing after this, especially after the Binance one more so than Coinbase. Coinbase, you know, we had the Wells notice, we knew something was coming. Yeah, it was a bit more aggressive than we thought, but I think if that happened and we didn't get the Binance one, I don't think we'd be as kind of shocked. I think the stuff around CZ and this sounding like FTX at an even bigger scale is what everyone's really worried about.
00:24:00
Speaker
And we saw some kind of jitters happening on Binance, in particular Binance US, where actually like I saw yesterday Bitcoin was trading at a 6% premium on Binance US because all of the fiat liquidity on the trading pairs in Binance US was drying up because everyone was getting freaked out and scared and fleeing and not wanting to trust in the fact that their payment rails are going to actually work. So that happened, but
00:24:28
Speaker
We have not seen the market even remotely tanked. If anything, the news initially came out and we have slight pullback. And since then, the market has, I don't want to use the word rallied, but has kind of gained on this. I don't know whether this is the like, better the devil you know, like we've got the information, it's less unknown. I will say that these lawsuits are going to take years to come to fruition. How long have we been talking about
00:24:54
Speaker
uh ripple right and i think actually that should come to fruition this month if i'm if i'm correct finally um but you know uh that that's kind of a a big kind of piece in all of this i'll also say just on the ripple piece of note that finance lists uh xrp but
00:25:14
Speaker
they did not mention XRP as a security in the filing, in amongst all of those that were mentioned, even though the SEC has an ongoing multi-year long battle with XRP claiming it is a security. Interesting observation. Which I did think was very interesting in this. So whether that is sign of where they think the case is going, who knows. But when we think about what this means for crypto,
00:25:42
Speaker
You know, I've went back and forth on this a lot. This sucks for the U.S. But kind of get into a space where I'm a bit like, you know what? At least we kind of know what the deal is here. We know what they're going after. We have the information now. And I think over the coming months, years, as this like drags out, we're gonna kind of see how this all plays out with Coinbase.
00:26:09
Speaker
Binance, on the other hand, I think is where we're wondering, okay, does this turn into an FTX situation? What do we not know about this? I think that is the piece that everyone's worried about.
00:26:22
Speaker
Exactly. I mean, the complaint against Binance really appears to be much more serious than the complaint against Coinbase, especially those points around commingling customer funds. I mean, you don't see anything like that in the Coinbase complaint. And also there are no fraud allegations in the Coinbase complaint. And as we mentioned earlier, you know, the CEO is mentioned in the Binance complaint, but not really in the Coinbase complaint. So
00:26:50
Speaker
Yeah. I'm hoping that a month from now or two months from now or whatever it may be, we're not having another FTX conversation. As we've said many times, it would be very bad for the space.
00:27:05
Speaker
It would be really, really bad.
Crypto Market's Resilience
00:27:07
Speaker
I think this is bad enough hearing the allegations that are put forward. And as much as I'd like to imagine that there's completely no truth to them, it's hard to believe that there's no foundation to what's going on here, especially as you start going through some of the details in some of this stuff.
00:27:26
Speaker
Anyway, I think what's positive is the market hasn't kind of responded badly to this. Coinbase are fighting the good fight and I think they're going to be joined by many others, I'm sure. And we're getting one small step closer to having some sense of a set of rules that we can operate within to kind of
00:27:49
Speaker
ultimately better protect people in the space and avoid future FTX type situations, which is what everyone wants. I'm sure there's going to be a ton of it. That is the most positive, striving for the silver lining, optimistic, generous take that you could ever have, Matt. So thank you for ending us on a positive note. You've pulled it off, the impossible.
00:28:13
Speaker
Maybe the bar was so low after the past year that we that we had in 2022 I don't know I'm I'm stretching for silver linings here, but Let's wrap this up. There's gonna be a lot of developments where I'm sure there's gonna be a Lot happening over the coming weeks, which of course will be covering as always Austin it's been a pleasure and as always see you next week
00:28:59
Speaker
The contents of the Decrypting Crypto podcast should not be used and are not intended as investment advice. Please do your own due diligence before making any investment, cryptocurrency or otherwise.