Just when everybody thought the Securities and Exchange Commission (SEC) had enough, a new lawsuits against crypto came down the line. In the series of the latest development , SEC decided to sue Coinbase, just a day after it decided to sue Binance.
These SEC crypto lawsuits present the most recent moves in a slew of steps that regulators have taken against cryptocurrency companies.
The company that collapsed spectacularly and is currently under investigation for a number of criminal offenses that could land its founder and former CEO, Sam Bankman-Fried, in jail for more than a century has been the biggest target thus far.
Since FTX closed its doors, Binance’s market share has increased significantly, and in recent months, regulators and law enforcement organizations in the United States and other countries have turned their attention to the company.
The Commodity Futures Trading Commission most recently accused the corporation of breaking the Commodity Exchange Act and various CFTC rules in March.
The cryptosphere has frequently been referred by SEC’s Chair Gary Gensler himself as “the Wild West.”
These are the biggest U.S. Government and SEC crypto lawsuits against crypto companies:
On June 5, the leading cryptocurrency exchange in the world, Binance, and its billionaire co-founder and CEO, Changpeng Zhao, also known as CZ, were charged with 13 offenses by the Securities and Exchange Commission (SEC). It’s the latest in a spate of actions being launched against crypto firms.
The SEC filed a lawsuit against Zhao and his company in the U.S. District Court for the District of Columbia, accusing them, among other things, of misleading investors about Binance’s capacity to identify market manipulation, misusing customer funds, and sending some of those funds to a business owned by CZ.
Additionally, the SEC charged Binance with operating an unlicensed trading platform in the country and enabling U.S. clients to trade cryptocurrencies on an exchange that is supposed to be closed to U.S. investors.
In its blog post , Binance expressed its disappointment by saying “that the U.S. Securities and Exchange Commission chose to file a complaint today against Binance seeking, among other remedies, purported emergency relief.” The company added that it has “actively cooperated with the SEC’s investigations” and “engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations.”
The US Commodities Futures Trading Commission (CFTC) declared on March 27 that it intended to pursue a permanent trading halt for Binance.
In addition to its founder and CEO, Zhao, the civil enforcement case against Binance, the largest cryptocurrency exchange in the world, was brought in a federal court in Chicago.
For reference, trading in cryptocurrency derivatives is prohibited for American citizens. Therefore, global trading platforms like Binance must either register with the CFTC or stop accepting American traders.
In spite of declaring in 2019 that they would stop doing so, Binance allegedly continued to serve US-based customers in violation of the CFTC’s complaint. Additionally, it was claimed that the cryptocurrency exchange was assisting clients in evading anti-money laundering (AML) regulatory procedures such as know-your-customer (KYC) checks, thus flouting laws intended to protect American consumers from financial crime.
In his formal answer to the CFTC, CZ Zhao stressed that Binance works with governments and regulators all over the world and that he is “aware of no other company using systems more comprehensive or more effective” for KYC and AML compliance.
Shortly after the second anniversary of Coinbase’s IPO (COIN) being approved, on June 6, 2023, the SEC filed a federal court lawsuit against this cryptocurrency exchange, alleging that the business is functioning as an unregistered exchange and broker. In a more recent development, the SEC replied to Coinbase’s writ of mandamus petition on May 15, asking the court to order the SEC to respond with a simple yes or no regarding whether it will pursue rulemaking for the cryptocurrency business.
Coinbase expressed excitement for the impending opportunity to offer a formal response in response to this most recent answer from the SEC and filed a formal mandamus on May 22.
On May 15, SEC took the initiative to file more crypto lawsuits. It filed court order in an attempt to dismiss Coinbase’s request for a response to its rules petition. However, it also acknowledged its ongoing reliance on enforcement actions as a substitute for rule-making in the foreseeable future.
The lack of clear rules impedes productive activities, stifles innovation, and jeopardizes the United States’ larger economic and strategic interests. Even the Chamber of Commerce expressed concern over how the SEC ambiguity has hurt Coinbase’s and the larger business community’s bottom lines.
To address this issue, Coinbase petitioned the Third Circuit Court of Appeals a month ago, requesting that the SEC provide “regulatory clarity” regarding the application of existing securities laws to the rapidly evolving digital asset industry.
The SEC charged Ripple for raising more than $1 billion in 2013 through the sale of XRP in an unregistered security offering to investors in 2020. Ripple subsequently countered that XRP is not a security and that the SEC did not provide fair notice.
In the series of lawsuits, the SEC subsequently requested an immediate hearing from the judge, and in June 2021, the court extended the SEC’s deadline for publishing its internal crypto trading policies.
Ripple Labs defended itself by claiming that “XRP does not qualify as an investment contract,” despite the fact that the company had never entered into such a contract with its investors in the first place. Furthermore, because XRP is a virtual asset, it is not subject to SEC regulation.
SEC has been investigating Ripple and its XRP token for a lengthy time now, accusing the business of issuing unregistered securities.
The case between the regulator and Ripple is currently in court, but the balance of power appears to shift on a regular basis.
At first, the SEC was clearly dominating, but the CEO of Ripple Labs, Brad Garlinghouse, is now convinced Ripple will easily win this battle. Garlinghouse stated in a recent interview he shared on Twitter that the outcome of the “Ripple vs. SEC” case would have far-reaching implications for the entire crypto industry. He added the case should come to an end very soon.
In February, Terraform Labs and its CEO, Do Kwon, were charged with fraud by the SEC, alleging that they engineered a multibillion-dollar “crypto asset securities fraud.”
From April 2018 until the collapse of TerraUSD, also known as UST, and its sister coin Luna in May 2022, Kwon and Terraform allegedly schemed to raise billions of dollars from investors through the offer and sale of a “inter-connected suite” of crypto asset securities, including securities-based swaps that mirrored U.S. equities and, most famously, the so-called “algorithmic stablecoin” TerraUSD.
According to the series of crypto lawsuits filed by the SEC, the business advertised UST as a “yield-bearing” coin, promising to pay up to 20% interest.
UST, like many stablecoins, was pegged to the dollar at a one-to-one ratio. Minting one new UST necessitated “burning,” or destroying, one Luna. This arrangement enabled arbitrage opportunities that were critical to the peg’s survival: users could always swap one Luna for UST at a guaranteed price of $1, regardless of the market price of either token at the moment.
However, the price of Luna became unstable, forcing UST to abandon its $1 peg, sending both Terra and Luna into a tailspin.
The complaint against Kwon and Terraform was filed in federal court in Manhattan for the Southern District of New York, charging both with violating the Securities and Exchange Acts’ registration and anti-fraud sections.
In the latest development, a court in Montenegro has dismissed the State Prosecutor’s Office’s appeal against Do Kwon, the co-founder of Terraform Labs, and his former CFO Han Chang-Joon’s bail. The two crypto executives are suspected of attempting to flee the country using forged passports after being sought by South Korean and US authorities for their role in the Terra collapse.
In December last year, SEC charged Sam Bankman-Fried with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX), the cryptocurrency trading platform he co-founded. Investigations into other alleged securities law crimes, as well as other organizations and individuals, were also made. According to the SEC’s lawsuit , FTX, domiciled in The Bahamas, has raised more than $1.8 billion from equity investors since at least May 2019, including roughly $1.1 billion from about 90 U.S.-based investors. Bankman-Fried touted FTX as a safe, responsible crypto asset trading platform in his investor representations, emphasizing FTX’s advanced, automated risk procedures to protect customer assets.
Bankman-Fried allegedly orchestrated a years-long fraud to conceal from FTX’s investors (1) the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund; and (2) the undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key. Bankman-Fried was also accused of using commingled FTX client cash at Alameda to make unreported startup investments, expensive real estate acquisitions, and big political donations.
A few months ago, the probability of an FTX reboot under the new name FTX 2.0 and the new CEO John Ray III, emerged and drew a lot of attention from the crypto community. For the time being, ex-Enron attorney John Ray III is effectively leading the way in restoring FTX functionality, trying to provide clients with a better experience and challenge Binance’s dominance.
However, success is dependent on issues such as restoring confidence, dealing with declining volumes, and resolving complex financial disputes.
As for now, the crypto world is keeping a close eye on FTX’s progress. Some are optimistic, while others are pessimistic about the exchange’s capacity to recover.
The current issue facing crypto companies is that their AML teams are not as developed and experienced as those of traditional financial institutions. They don’t have the advanced infrastructure necessary to withstand the growing regulatory crackdown in the US.
While the US crypto business is now issuing empty threats, there could be a serious issue if American regulators do not go forward with thoughtful regulation.
If the SEC continues on its current course, many businesses will be forced to seek alternative methods of conducting business, such as moving it to different (and better-regulated) countries.