MC Explains: Why Coinbase and Binance are in the crosshairs of US regulators

Cryptocurrencies

Over the past week, Coinbase and Binance, two of the biggest cryptocurrency exchanges in the world, have come under the radar of the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC), respectively. The SEC, in particular, has been on a quest to crack down on digital currencies.

According to media reports, the SEC has been investigating claims of stablecoins and cryptocurrencies being able to maintain a fixed price of $1. This is among various other products being investigated by the commission in relation to violation of investor-protection laws.

The move put BUSD or Binance USD, the third largest stablecoin by market value, under pressure as the SEC issued another Wells notice to Paxos Trust, which owned and operated BUSD, in February. A Wells notice is sent by the securities regulator to warn of a prospective lawsuit if it thinks investor protection laws have been violated.

The current ongoings at the SEC were mainly triggered by the fall of crypto exchange FTX and the ensuing repercussions.

Here’s a primer on what’s happened so far and how the exchanges are approaching the next steps.

Why Coinbase?

According to a report by the Wall Street Journal (WSJ), on March 22, Coinbase said it had received a Wells notice from the SEC. A Wells notice is a letter sent to convey that the regulator believes that the companies or individuals possibly violated investor-protection laws. The notice is issued before filing a lawsuit. It does not have the agency commissioner’s authorisation as is required for any lawsuits or enforcement settlements.

This SEC notice raised concerns around several aspects of “Coinbase’s business, including assets listed on its crypto exchange, its staking service Coinbase Earn and its wallet service,” Coinbase said.

This is a major step by the SEC given that the 11-year-old Coinbase is a publicly traded company that brings tens of millions of customers into digital currency markets.

The notice raised concerns on several aspects of Coinbase’s business, including assets listed on its crypto exchange, its staking service Coinbase Earn and its wallet service, Coinbase said.

What went wrong with Binance?

Meanwhile, the CFTC filed a lawsuit against Binance on March 27 at a federal court in Chicago, alleging that Binance and its CEO Changpeng Zhao (CZ) had broken American derivatives rules by letting US customers trade in crypto derivatives without registering with the agency, according to a report by Bloomberg.

Note, there are no direct accusations of Binance stealing money from customers or laundering money and using it for illegal purposes etc. as of now; but the agency alleged that the crypto exchange failed to implement an effective anti-money laundering program. It also said that Binance couldn’t establish necessary safeguards to determine the real identity of customers.

Along with CZ and several of Binance’s entities, the CFTC also mentioned that Samuel Lim, Binance’s former chief compliance officer, had allegedly broken its rules.

Binance is by far the largest crypto trading platform in the world. The exchange reported a trading volume of over $55 billion in just the last 24 hours.

What’s next for these exchanges?

In the case of Coinbase, since it’s a Wells notice and not a lawsuit yet, the SEC’s enforcement process will allow the exchange the right to respond to the notice and argue its case. Post that, the SEC will have about six months from the time of delivering the notice to decide on going ahead with a lawsuit. It can also extend this timeline.

According to Marc Fagel, a former director of the SEC’s San Francisco office quoted by WSJ, the scope of an SEC lawsuit may change over the coming months as the exchange’s lawyers and regulators spar over the investigation. And companies like Coinbase too will try to settle first after receiving Wells notices “if they can limit the damage to their business.”

For Binance though, the CFTC is just a civil government agency which could impose hefty fines and other penalties, Bloomberg said. But the agency can’t bring criminal charges against firms or seek jail time for individuals.

What does this mean for the customers?

As of now, there is nothing much of concern for customers or retail investors, except fluctuating token prices. For instance, since the lawsuit filing came to light Bitcoin has dropped by around $1,000 while Binance coin plunged by about 3 percent.

Coinbase also said recently that based on the current Wells notice, it won’t have to make any changes to its products and offerings.

According to Wall Street research and brokerage firm Bernstein’s research report, as part of the settlement, Binance may be asked to shut its US operations, though Binance.US is less than 5 percent of the exchange’s overall business.

But that is yet to be seen. Ultimately, whatever the outcomes of these cases are, they will help in bringing more clarity around regulations for these exchanges. This will, in turn, benefit end customers.