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Markets Startled Following SEC Legal Actions Against Binance and Coinbase

Updated on June 6, 2023

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The US Securities and Exchange Commission said on Tuesday that Coinbase has been running “an unregistered exchange, broker, and clearing agency” since 2019. The domestic markets regulator also faulted the exchange for “the unregistered offer and sale of securities in connection with its staking-as-a-service program.” The latest enforcement action from the SEC comes barely 24 hours since it announced similar legal action against Binance, the largest cryptocurrency exchange globally.

SEC claims several tokens listed on Binance are securities

The US Securities and Exchange Commission (SEC) on Monday filed a lawsuit against Binance, and its CEO, Changpeng Zhao, sending shock waves throughout the industry. The watchdog agency alleged that Binance violated US securities laws by attracting US customers to its unregulated international exchange, commingling investor funds with its own, and engaging in the sale of securities including SOL, ADA, MATIC, COTI, ALGO, FIL, ATOM, AXS, MANA, and the Sandbox platform AXS.

The SEC is convinced some serious violations happened

The SEC lawsuit follows an earlier complaint filed earlier this year by the Commodity Futures Trading Commission (CFTC), presenting 13 charges encompassing various serious accusations, including deceptive practices, conflicts of interest, lack of disclosure, and intentional evasion of the law. It claims that Binance established Binance.US as a shield to protect the main company and Zhao, enabling them to evade law enforcement scrutiny and protect themselves.

The lawsuit additionally claimed that Binance enticed US customers, despite federal laws prohibiting the unregistered offer and sale of securities, with the SEC asserting that Binance was aware of its US customer base but failed to take appropriate action, hiding behind the cover of compliance efforts.

Market manipulation claims

Furthermore, the SEC accused Binance and Zhao of engaging in market manipulation. It suggested that Binance utilized market-making companies like Merit Peak and Sigma Chain to artificially inflate trading prices, profiting at customers' expense.

These companies, allegedly owned by Zhao, purportedly mixed customer funds with Binance's own capital and participated in “wash trading,” which artificially inflated the price of crypto assets. The SEC highlighted an instance where Sigma Chain used customer funds to acquire a luxurious yacht valued at $11 million.

Binance believes the SEC wants to wield unilateral power over crypto

The regulator seeks to prohibit Zhao from assuming roles as an officer and director of any securities issuer. It also aims to restrain Binance, Binance.US, and CZ from engaging in trading activities involving securities, which encompasses crypto asset securities. Moreover, the lawsuit requests that the defendants be barred from assuming positions as an unregistered broker, clearing agency, or exchange concerning any crypto asset securities.

On its part, Binance perceives the regulator's actions as an attempt to wield unilateral power over the crypto space. Binance.US and Binance released statements acknowledging the SEC's investigation, expressing their commitment to cooperating and addressing the concerns raised. They vehemently denied any risk to user assets, assuring the public that all user assets on Binance and its affiliate platforms, including Binance.US, are secure, pledging to defend against any allegations to the contrary vigorously.

Market reaction

The early week's unsettling reports have delivered losses in the market. Coinbase (COIN) shares tumbled 20% on Tuesday premarket.

COIN stock. Source:TradingView

MicroStrategy, the biggest corporate holder of Bitcoin, saw an 8.5% downturn in share value on Monday, consistent with several crypto mining entities, including Riot Blockchain – 8.8%, Marathon Digital – 8.37% and Bitfarms – 7.41%. Tuesday

The crypto spot market has tracked a similar course, with Bitcoin tracing a slump to $25,490, where it was last spotted trading. Ethereum (Ether) has trailed the flagship crypto and was grappling to remain above the $1,800 support level at the time of writing.