The U.S. Securities and Exchange Commission (SEC) asked a court to grant a temporary restraining order to freeze assets tied to Binance.US on Tuesday. If granted, Binance would have five days to prove only Binance.US has access to customer funds, and 30 days to transfer those funds to wallets only the U.S.-based unit of the global exchange can access. This follows the SEC lawsuit filed against Binance.US, Binance Global and Binance CEO Changpeng Zhao on Monday, alleging a host of compliance and control failures, including claims that Zhao secretly had access to customer funds. Binance has stated all user assets “are safe and secure,” and said it would “vigorously defend against any allegations to the contrary,” in a statement.
Back to Coinbase
A top U.S. court has ordered the U.S. Securities and Exchange Commission (SEC) to answer a petition from Coinbase asking for clarity on the agency’s crypto policy, which the exchange filed in 2022 in a bid to spur formal rulemaking for the digital assets sector. Hours after the SEC announced it is suing the major U.S. crypto exchange, a judge in the U.S. Court of Appeals said the SEC must respond to Coinbase’s query within seven days. Elsewhere, Cathie Wood’s Ark Investment Management, the second-largest holder of Coinbase Global (COIN) stock, doubled down on its investment and bought around $21.6 million worth of COIN stock on Tuesday. Ark’s now holds a total 11.44 million Coinbase shares (~$590 million), which closed down over 12% yesterday.
Hermit Kingdom Hackers
Evidence suggests the recent attack of Atomic Wallet, which cost users an estimated $35 million in lost funds, was committed by the infamous North Korean hacking group Lazarus. According to blockchain intelligence firm Elliptic, some of the stolen assets sent to a blockchain transaction mixer called Sindbad.io ended up in wallets thought to be connected to Lazarus (which came into prominence in crypto after exploiting the Ronen bridge last year). The nature of the hack is still unknown, though last year, security audit company Least Authority warned the wallets were vulnerable to breaches, and more recently security firm Hacken said the non-custodial service “relied on an outdated and vulnerable” tech.
From privacy to regulation to governance to self-custody, an exploration of vital challenges facing the crypto community based on intimate, curated conversations held at Consensus 2023.
Consensus 2023 attendees unpack the future of Web3 and its implications for creator-first digital economies in an excerpt from CoinDesk’s first-ever Consensus @ Consensus Report.
The Takeaway: Scaremonger SEC
(CoinDesk)
The U.S. Securities and Exchange Commission’s (SEC) one-two punch of suits against Binance and Coinbase this week hardly came out of the blue. The question of how to regulate crypto exchanges has been at a high simmer for years, and while the specifics of their approach are eminently debatable, the SEC was bound to go after the big boys sooner rather than later.
But the messaging surrounding the suits makes the SEC’s recent moves seem reactive, political and frankly, just beneath the bluster, weak. Specifically, the SEC seems to be trying to put Coinbase and Binance into the same bucket as the frauds of 2022, such as Luna, Celsius and above all FTX. The SEC has been widely viewed as giving FTX deferential treatment before it was revealed as a massive fraud, so now it’s demonstrating that it really can be a hard-nosed regulator – it’s just doing so a couple of years late, and to the wrong targets.
Essentially, the SEC wants the public to see the current suits as part of a campaign against fraud. In reality, the suits represent a paternalistic attempt to keep people from making what the SEC views as the wrong kind of investments. That conflation is obviously deeply unfair, both to the companies being targeted – Coinbase especially – and to an American public that looks to the SEC for actual expertise.
Crimes and sins
The SEC, like all legislators and regulators, can’t be expected to distinguish between crimes that break the law, and sins that actually harm and exploit people. Regulators enforce codes, not morality itself – but that doesn’t mean such distinctions don’t exist.
The SEC’s core claim in the court document against Coinbase is simply that it “has made calculated business decisions to make crypto assets available for trading in order to increase its own revenues, which are primarily based on trading fees from customers.”
There’s a complex debate to be had about whether Coinbase could have complied with the rules in the way the SEC says it should have. But the substance of the SEC claim here is that Coinbase broke the rules by creating a service that customers (including me) actually used, and then tried to make it better.
Yet the Coinbase charges are being tortuously represented as protecting investors against some manipulative, horrifying predator. SEC director of enforcement Gurbir S. Grewal, in a quote which the SEC has highlighted on social media, alleges that “Coinbase’s calculated decisions allowed it to earn billions … at the expense of investors by depriving them of the protections to which they were entitled.”
Binance, by contrast, does stand accused of a few things that look like genuine sins, particularly price manipulation that harmed customers. But other charges against Binance amount to a denial of its right to provide services that its customers clearly want.
If the protections Grewal wants include standards for reporting and transparency around assets similar to what exists in the stock market, it seems clear both U.S. and global exchanges would welcome such a regime.
But in fact, the SEC appears to think crypto exchanges are exploiting their customers simply by allowing them to do anything so foolish as buying cryptocurrency under their own free will.
‘We don’t need more digital currency.’
The SEC’s suit against Coinbase in particular hinges on the moral presumption that cryptocurrency is inherently fraudulent and valueless. This allows them to paint Coinbase CEO Brian Armstrong as the same as Sam Bankman-Fried in the public eye – despite the fact that the first has run a stable and trustworthy service for a decade, and the second was an incompetent boob with zero moral compass or basic mathematical ability.
SEC Chair Gary Gensler advanced that muddying agenda this morning on CNBC. He first made noises about the SEC’s supposed neutrality on asset quality. But he then launched into a sweeping and frankly boneheaded disquisition against crypto as such, declaring that “we don’t need more digital currency, we have digital currency. It’s called the U.S. dollar. It’s called the euro. It’s called the yen. They’re all digital right now.”
This is not just an embarrassing misrepresentation, but one Gensler must know the truth of. After all, he taught MIT students about blockchains. He can’t possibly actually believe there’s no distinction between the banking rails over which he and the rest of the U.S. government have incredibly oppressive, direct, and politicized control, and monetary cryptocurrency networks they don’t and ultimately can’t control.
Gensler appears fully pot committed, in short, to misrepresenting the underlying facts to the public.
An embarrassment of entanglements
This is all best understood in the context of what happened in 2022. In fact, the SEC and other regulators performed pretty admirably in moving against frauds at the top of the crypto bubble. They put productive pressure on both Do Kwon’s Luna and Alex Mashinsky’s Celsius.
But Gary Gensler personally wound up embarrassingly exposed on Sam Bankman-Fried and FTX, above all because Gensler’s staff reportedly had ongoing discussions of crypto regulation with an FTX team. That intimacy may have kept them from seeing the fraud – at least one congressman publicly laid blame for FTX at Gensler’s feet. Though Gensler wasn’t involved, Sam Bankman-Fried’s appearances before Congress increased the impression that the FTX founder had special access to regulators.
Now, while there are legitimate reasons for the SEC’s charges against Binance and Coinbase, it’s hard to escape the sense that they are being framed as a do-over for the SEC’s and Gensler’s FTX missteps. But that doesn’t mean they’re actually the same thing, and misleading the public to that effect may wind up undermining Gensler’s position in the long run.
Since the collapse of large crypto projects like FTX and BlockFi, investors have been cautious about parking their funds with centralized exchanges, which, some believe, are susceptible to collapse in ways that might leave their customers empty-handed.
To access services like staking rewards, centralized exchanges often require customers to “lock up” their tokens in accounts that can’t be accessed for a period of time, or might be used by an exchange for other purposes. So when panic strikes or there’s a bank run, as in the case of FTX, customer funds can be lost altogether. With the collapse of these firms, investors learned that when their funds are delegated to a third party, it no longer fully belongs to them. As the expression goes, “not your keys, not your crypto.”
