What’s Next From the SEC’s Crypto Lawsuits

There’s an old saying: “May you live in interesting times.” Few would argue that last week was an extremely interesting one, especially within the cryptocurrency sector. On Monday, the U.S. Securities and Exchange Commission filed a lawsuit against Binance.us — a subsidiary of the largest cryptocurrency exchange in the world — alleging a slate of bad behaviors including misuse of investor funds, deceptions surrounding its market surveillance controls and trading volumes, as well as attempts to avoid U.S. taxes. 

Within hours the Binance team bounced back with its official response, asserting its innocence, making multiple good-faith attempts to resolve the SEC’s investigation, to no avail, and stating its intent to vigorously defend itself. 

SEC Delivers Crypto-Combo of Litigation

Without missing a beat, the SEC followed up the very next day with a complaint filed against the largest U.S.-based cryptocurrency exchange, Coinbase (Nasdaq: COIN). The SEC’s second legal filing in as many days alleged that Coinbase had been operating for years as an unregistered broker, securities exchange, and clearing agency. On page 33 of that complaint, the SEC also called out 13 specific digital assets dubbing them securities including Cardano (ADA), Solana (SOL), and Polygon (MATIC). 

Almost immediately in response, Coinbase CEO Brian Armstrong blasted a tweet to his 1.2 million Twitter followers asserting, “We’re proud to represent the industry in court to finally get some clarity around crypto rules. Instead of publishing a clear rule book, the SEC has taken a regulation-by-enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”

Surprises Surface in the SEC’s Legal Wake

Additional interesting developments have surfaced since the SEC’s double-barrel legal shots across the bows of both Binance.us and Coinbase respectively. Late Thursday, Binance announced the suspension of deposits and transactions using U.S. dollars on its digital trading platform in an effort to “protect our customers and platform” as it works to become a crypto-only exchange.

Perhaps even more interesting was the fact that, according to Dataroma.com, there were eight transactions disposing of more than 29,000 shares of COIN stock, generating more than $1.8 million — all in Brian Armstrong’s name the day before the SEC lawsuit was filed. 

While a Coinbase spokesperson confirmed via email that the transactions were filed in compliance with the SEC’s Rule 10b5-1 — which requires executives to confirm they have no knowledge of undisclosed intel that could move the stock price — the trade price per share for Armstrong’s transactions on June 5 ranged between $56.70 and $63.79, representing a tidy premium above the market close of $51.55 on June 6 after the lawsuit was filed. 

Ironically, while Armstrong’s transactions of Coinbase stock were compliant with SEC regulations before the lawsuit, the lawsuit asserts that crypto transactions on the Coinbase digital exchange were in violation of SEC regs.  

Support for Crypto and the SEC Lawsuits

“There’s an implication that businesses have to have enough money to defend themselves against an SEC lawsuit to operate in this space,” said Chamber of Progress policy director Janay Eyo in an email. “For startups, the increased legal costs are pricing them out of offering digital asset products and services. Tragically, the original vision of crypto and defi [decentralized finance] was to provide inclusive financial access for all, but the SEC’s enforcement actions lock the door for small businesses interested in entering the market.”

Stefan Rust, CEO of independent inflation data aggregator Truflation and former CEO of Bitcoin.com, noted that the SEC’s litigation will likely lead to the exit of crypto’s biggest companies from the US. “Regulators, led by Gary Gensler at the SEC, appear to be out to unseat the largest companies in the cryptocurrency space.”

While many additional voices came out against the SEC’s action, a surprising supporter appeared immediately following the filing of the lawsuit against Binance from venture capitalist and member of ABC’s Shark Tank Kevin O’Leary. O’Leary posted to his nearly 984,000 Twitter followers that he predicted such action was coming in an accompanying montage of time-stamped video clips. 

“The heavy hand of the regulators have been gearing up to come down to squeeze some heads, and there’s going to be no sympathy. We’re seeing that in action here with Binance. The Senate, the Hill, the legislators, the regulators, they’re done,” O’Leary tweeted.

Only time will tell what form congressional regulation of crypto will take here in the U.S., but we are certainly living in interesting times when it comes to digital assets.