On June 5, 2023, the SEC launched enforcement actions against crypto giants Binance and Coinbase in the U.S. District Court for the District of Columbia and the U.S. District Court for the Southern District of New York, respectively. SEC’s Binance action was launched against Binance Holdings Ltd., BAM Trading Services Inc. and their founder Changpeng Zhao (collectively “Binance”). SEC’s Coinbase action was launched against Coinbase Inc. (“Coinbase”). The lawsuits sent shockwaves through the crypto community, with commentators accusing the SEC of “underhanded tactics and open hostility” and an ”attack not just on the crypto industry, but on American innovation”.
Charges against Binance
The SEC alleged that Binance violated the American securities laws[1] by: (1) operating unregistered securities exchanges, broker-dealers and clearing agencies; (2) engaging in the unregistered offer and sale of crypto assets; and (3) engaging “in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law”[2]. The claims against Zhao allege control person liability.
Binance issued a press release accusing the SEC of “regulation by enforcement” and picking on Binance to “make headlines”. Binance assured customers that user assets on the platform were “safe and secure” and vowed to fight the allegations. Binance also accused the SEC of overreach, noting that as “Binance is not a U.S. exchange, the SEC’s actions are limited in reach.”[3]
Charges against Coinbase
Similar to the Binance action, the SEC alleged that Coinbase operated as an unregistered securities exchange, broker-dealer and clearing agency. However, the SEC’s allegations about unregistered offer and sale of crypto assets related to Coinbase’s “staking as a service” program[4]. Claims were also made against Coinbase’s holding company, Coinbase Global Inc. (CGI), for control person liability.
Coinbase’s CEO, Brian Armstrong, expressed confidence that his firm would prevail, reassuring investors their funds were safe and that “it’s business as usual right now”. Armstrong criticized the US securities regulatory regime, describing it as an “outlier” in the world due to no options for registration as a legitimate exchange.
Implications for Canadian Securities Law
Binance is not registered to operate in Canada as a cryptoexchange. While Binance originally planned to pursue registration in Canada, it changed its mind and announced on May 12, 2023 that it was quitting Canada.[5] Binance’s exit came shortly after the OSC issued an investigation order and summons, which Binance sought to quash. For Canadian regulators, the allegations in the SEC v. Binance litigation are likely seen as supporting their decision to pressure Binance to register or leave. It is unlikely that a regulated entity could easily have engaged in market manipulation, misuse of consumer funds and compliance breaches (as SEC alleges Binance had done).
Coinbase is in the process of registering to operate in Canada[6], and on March 24, 2023 it signed on to enhanced preregistration undertaking requirements. The SEC’s allegations against Coinbase are unlikely to spook Canadian regulators. First, Coinbase is actively pursuing registration in the Canadian market. Second, while the SEC frowns upon Coinbase’s “staking as a service” program, Canadian authorities have been more lenient. For example, Coinbase’s preregistration undertaking permits it to offer certain staking services, subject to conditions[7]. The CSA itself does not explicitly prohibit staking, only noting (in recent guidance) that “depending on how it is conducted, staking may involve the issuance of a security or derivative”.[8]
The SEC’s actions against crypto giants Binance and Coinbase will likely have little effect on the Canadian regulatory landscape. Binance has received the cold shoulder from Canadian regulators and is not pursuing registration in Canada, so the SEC’s allegations seem moot. And while Coinbase is pursuing registration in Canada, the SEC’s allegations (that staking is illegal and that Coinbase is operating an unlicensed exchange) are ones that are not applicable in Canada.
[1] Specifically, the action alleged violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.
[2] These were SEC Chair Gary Gensler’s words. The allegedly wrongful acts (as laid out in the Complaint) include artificially inflating the platform’s trading volumes, commingling or diverting customer assets as Binance pleased, allowing high-value US clients to transact on Binance.com and secretly controlling Binance.us’ operations behind the scenes.
[3] The SEC complaint states that Binance.com is a Cayman Islands limited liability company. The SEC complaint rejects claims by Binance’s CEO Changpeng Zhao that Binance has no headquarters because its “leadership team are [sic] not sitting in one office”.
[4] Coinbase offered staking for five crypto assets: XTZ (Tezos), ATOM (Cosmos), ETH (Ethereum), ADA (Cardano), and SOL (Solana).
[5] According to Binance’s announcement, the decision to leave the Canadian market was due to enhanced preregistration undertaking requirements introduced by the CSA. According to Binance, these stricter conditions made Canada “no longer tenable” as a market.
[6] A list of crypto exchanges registered to operate in Canada is available on the OSC’s website at https://www.osc.ca/en/industry/registration-and-compliance/registered-crypto-asset-trading-platforms.
[7] See Crypto Asset Trading Platforms Pre-Registration Activities Undertaking dated March 24, 2023 at Schedule IV (Staking Services Provisions). Conditions include restrictions on the types of crypto assets that may be staked as well as requirements for account appropriateness assessments, custody of staked assets and ongoing validator monitoring.
[8] CSA Staff Notice 81-336 dated July 6, 2023, “Guidance on Crypto Asset Investment Funds That Are Reporting Issuers”.