[The agency has sued both Binance and Coinbase for violating
securities law.]
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THE SEC COMES FOR BIG CRYPTO  
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Ryan Cooper
June 7, 2023
The American Prospect
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_ The agency has sued both Binance and Coinbase for violating
securities law. _

, Jonathan Raa/NURPHOTO via AP

 

The crypto industry hasn’t had a great year
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We’ve seen the epic collapse of FTX, and the prosecution of its boy
king Sam Bankman-Fried, followed by the bankruptcies of BlockFi,
Voyager Digital, and Celsius. As a result, the value of all the major
cryptocurrencies has plummeted from their late-2021 highs. Venture
capital investment in the industry has also nearly collapsed
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with just half a billion so far this year as against $21.6 billion in
2022.

And now the Securities and Exchange Commission (SEC) has filed
lawsuits against the two largest remaining crypto players: Binance
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This step is long overdue, but still welcome. Whatever the actual
results of the lawsuits, they make clear that the entire business
model of crypto was doing an end run around financial regulation,
except without the burdensome encumbrance of real businesses.

The two lawsuits are structurally similar. The SEC accuses both
companies of conducting three kinds of securities
businesses—exchange, broker-dealer, and clearinghouse—without
registering for any of them as required by U.S. law. These are
bog-standard financial industry activities: An exchange helps clients
buy or sell securities to each other; a broker-dealer will buy and
sell securities on behalf of itself and its clients; and a
clearinghouse nets out securities transactions across a whole
marketplace to facilitate trading.

_MORE FROM RYAN COOPER_ [[link removed]]

The lawsuit obviously turns on the definition of a security. I’m not
a lawyer, but the legal definition of a security is incredibly broad
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any rational understanding of how crypto assets are supposed to work.
The Supreme Court has summarized
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as “investment of money in a common enterprise with profits to come
solely from the efforts of others; and, if that test be satisfied, it
is immaterial whether the enterprise is speculative or nonspeculative,
or whether there is a sale of property with or without intrinsic
value.” The vast majority of people invest in crypto stuff to make
money; the companies are advertised as such, and as the SEC points
out, both Binance and Coinbase offer “staking” services, which
offer profits in return for an investment of coins.

Despite the lawsuits’ similarity, the one against Binance is a lot
juicier. The SEC complaint accuses Binance CEO Changpeng Zhao, along
with other company executives, of conspiring to escape regulation.
Under “Zhao’s control,” it says, they “designed and
implemented a multi-step plan to surreptitiously evade U.S. laws.”
One way they allegedly did this was by creating two entities, BAM
Management and BAM Trading, that supposedly controlled the Binance.US
system for American clients. “Behind the scenes, however, Zhao and
Binance were intimately involved in directing BAM Trading’s U.S.
business operations and providing and maintaining the crypto asset
services of the Binance.US Platform.”

Another alleged strategy was simple lies. They “consistently claimed
to the public that the Binance.com Platform did not serve U.S.
persons, while simultaneously concealing their efforts to ensure that
the most valuable U.S. customers continued trading on the platform.”
The SEC has communication from the Binance chief compliance officer
admitting “[o]n the surface we cannot be seen to have US users[,]
but in reality, we should get them through other creative means.”

This COO was apparently particularly indiscreet, elsewhere writing
that “we do not want [Binance].com to be regulated ever” and “we
are operating as a fking unlicensed securities exchange in the USA
bro.” Which is kind of something you don’t want to write down, in
case it ever gets used in a federal lawsuit about your unlicensed
security exchange.

Finally, Zhao is accused of diverting customer assets to an entity he
controlled called Sigma Chain, which also “engaged in wash trading
that artificially inflated the trading volume of crypto asset
securities on the Binance.US Platform.”

The Coinbase lawsuit doesn’t have nearly so much incriminating
drama. Still, the core of the SEC complaint about failing to register
securities businesses is more important. Lying to regulators and
investors or stealing customers’ money is a crime as old as money
itself; it is important to prosecute, but it’s nothing new. Setting
up openly unregulated securities businesses, however, strikes at the
very heart of the U.S. financial system, and crypto bros have been
doing it with reckless abandon.

The point of financial regulation, as set up in the 1930s during the
New Deal, was to protect the integrity of financial markets. During
the Great Crash of 1929, the country had seen that beneath the
gigantic stock market boom of the 1920s was a writhing mass of fraud.
Real estate, manufacturing, investment, stock trading—whatever
sector of the economy you could name, you could find a major infection
of swindling and corruption.

Hence the Securities Act of 1933, which defined and regulated
securities, and the Securities Exchange Act of 1934, which set up the
SEC and added more controls. The idea was that by mandating that any
company that sells, buys, or trades securities register with the SEC
and submit public financial disclosures, together with strict
oversight and punishment of deception or cheating, people would have
the confidence to invest their money through the financial system, and
that investment would be channeled toward productive enterprise.

There is no better proof of this than the crypto industry itself. It
is simply _lousy_ with scams
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to any student of 19th-century financial panics—pump-and-dumps,
Ponzi schemes, market corners, fake companies, and so on—plus new
ones like rug pulls or wash trading. Indeed, one could argue that the
entire crypto ecosystem is fraudulent to its core, since the only
evidently profitable businesses have been ones that took a cut from
people trading crypto magic beans back and forth, or just stole their
customers’ money.

Probably one or both of these cases will make it to the Supreme Court
eventually, where we’ll all get to learn if its reactionary majority
(last seen deciding that water is not, in fact, wet
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thinks that crypto assets are securities. I can’t wait for the
triumph of logic and reason!

But the Court’s musings aside, we can definitely say for sure that
in finance, without disclosure and regulators checking the books, what
happens is theft, and lots of it. We also learned this in the 2000s,
when New Deal–era regulations were rolled back and Wall Street blew
itself up less than a decade later.

For Binance at least, the Court’s decision may come too late. As of
early Tuesday morning, customers had pulled some $790 million
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of the company, and they probably won’t be the last. Too bad the SEC
didn’t get on this problem sooner, but better late than never.

Used with the permission © The American Prospect, Prospect.org
[[link removed]], 2023. All rights reserved.

Read the original article at Prospect.org.
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_RYAN COOPER is the Prospect’s managing editor, and author of How
Are You Going to Pay for That?: Smart Answers to the Dumbest Question
in Politics
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was previously a national correspondent for The Week. His work has
also appeared in The Nation, The New Republic, and Current
Affairs._

_THE AMERICAN PROSPECT: An independent voice for liberal thought._

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