The cryptocurrency industry has been under regular fire from regulators this year. The latest companies to face the wrath of the federal government are also some of the largest. Earlier this month the Securities and Exchange Commission (“SEC”) brought charges against Binance (and its founder, Changpeng Zhao) and Coinbase – both household names known by all – through its Division of Enforcement’s Crypto Assets and Cyber Unit. The Binance complaint and Coinbase complaint  are must-reads for those in the industry and for those advising the industry. While the facts of each case are unique, SEC has made clear that it intends to relentlessly pursue the digital assets industry and treat industry participants as if they are dealing in traditional asset classes, ignoring the differences between digital assets and traditional securities.

SEC v. Binance et al.

Defendants here include the Binance holding company and affiliate companies which operate the platform in the US, as well as founder Changpeng Zhao. “Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler. “As alleged, Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform, the manipulative trading of its affiliated market maker, and even where and with whom investor funds and crypto assets were custodied. They attempted to evade U.S. securities laws by announcing sham controls that they disregarded behind the scenes so that they could keep high-value U.S. customers on their platforms. The public should beware of investing any of their hard-earned assets with or on these unlawful platforms.” SEC charged Binance with operating an unregistered exchange, broker, and clearing agency, offering unregistered sales of crypto assets, failing to restrict US customers from accessing Binance’s international trading platform, and misleading investors concerning alleged internal controls and market surveillance features.

SEC v. Coinbase, Inc. and Coinbase Global, Inc.

SEC charged Coinbase, which is publicly traded and non-custodial, with operating an unregistered exchange, broker, and clearing agency because it “brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact,” “effect[s] securities transactions for the accounts” of its customers, and “serves as an intermediary in settling transactions in crypto asset securities.” Coinbase Global, Inc. serves as Coinbase’s holding company and was charged as a control person. SEC further alleged that Coinbase offered unregistered securities by offering customers its staking-as-a-service program, through which Coinbase allegedly pools each type of customers’ stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool.

SEC made clear (again) that centralized exchanges are subject to liability under securities laws, should expect scrutiny, and that the government’s ever-increasing pace and scope of prosecutions against such entities demands attention and forethought. Interestingly, the Binance and Coinbase lawsuits resulted in three of the largest decentralized exchanges seeing a short-term and dramatic increase in usage – allegedly 444%. Industry members ask where we go from here, and the answers are far from clear. It seems a safe bet to assume centralized exchanges that have not registered with SEC will continue to face prosecution. It is less clear what fate awaits decentralized exchanges and the decentralized finance industry, which have thus far avoided the SEC scrutiny experienced by their centralized counterparts. But SEC’s path has remained consistent, with prosecutions expanding to cover as much of the industry as possible.  Decentralized finance may be the next domino to fall.