Client Alert—Coinbase and Binance Lawsuits
On June 6, 2023, the U.S. Securities and Exchange Commission (“SEC”) brought a five-count civil complaint in New York federal court against Coinbase Inc. (“Coinbase”). The complaint alleges that Coinbase operates as an unregistered broker, exchange and clearing agency. The SEC asserts that Coinbase’s failure to register “deprive[s] investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.”
According to the SEC’s complaint, Coinbase lists at least 13 “crypto asset securities” on its platform and offers a “staking-as-a-service” product. Earlier this year, the SEC charged Kraken with failing to register its staking-as-a-service product; Kraken settled the case and shut down its staking investment program in the United States.
The complaint against Coinbase came one day after the SEC brought action against Binance Holdings Ltd. and its affiliates (“Binance”) for also operating as an unregistered broker, exchange and clearing agency. In addition, the SEC charged Binance with failing to restrict U.S. investors from accessing Binance.com and misleading investors concerning the existence of market surveillance and controls to prevent manipulative trading on an affiliated Binance website. The SEC also charged Binance’s founder and chief executive, Changpeng Zhao, with deliberately and secretly trying to evade US laws.
While the respective lawsuits against Coinbase and Binance largely overlap in terms of legal issues, the complaint against Coinbase notably lacks the allegations of fraud and mismanagement found throughout the Binance complaint. That may be one silver lining; a pivotal lawsuit involving the largest US-based crypto exchange—without the distraction of fraud charges—may provide the best opportunity to date for clear guidance regarding the application of existing US securities laws to crypto assets.
These cases also serve as a backdrop for any potential legislative action. Near-term legislative action appears unlikely, however, despite House members releasing a crypto regulation discussion draft last week. For now, the SEC appears to be intent on regulating crypto assets it deems securities through enforcement. We advise all industry participants to monitor these cases closely and proceed accordingly. For crypto fund managers and investors, we recommend identifying any potential liquidity risks resulting from exposure to targeted exchanges or tokens deemed to be unregistered securities by the SEC.
As always, please feel free to reach out to us if you have any questions.
 The Coinbase complaint lists 13 cryptocurrencies as securities: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO.