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by Jon Blistein
As part of its crypto crackdown, the Securities and Exchange Commission brought new charges against Coinbase, another major cryptocurrency exchange.
Coinbase has been serving as a securities exchange, broker, and clearing agency since at least 2019, but hasn’t registered with the SEC as such. According to the SEC, Coinbase has “deprived investors of significant protections,” including SEC inspections, record keeping requirements, and other safeguards.
A key safeguard is Coinbase’s allegation that it is working simultaneously as an exchange, broker, and clearing agency. These three key functions are typically separated in traditional securities markets, according to the complaint. Separating these functions is a major reason for the SEC, it noted, “to prevent conflicts of interest that can arise when these functions merge.”
SEC Chair Gary Gensler said Coinbase commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions despite being subject to securities laws. In other parts of our securities markets, these functions are separate. Investors are deprived of critical protections because of Coinbase’s alleged failures, including rulebooks that prevent fraud and manipulation, disclosure, conflict of interest safeguards, and routine SEC inspections.
Paul Grewal, Chief Legal Officer and General Counsel for Coinbase, commented on the charges made against them: “We believe that the SEC’s model of solely relying on enforcement without providing clear guidelines for the digital asset industry is damaging to US economic growth and business like Coinbase who have a long track record of conforming with regulations. The right answer lies in laws that are properly established through open dialogue and applied uniformly; litigation is not a viable solution. We will keep operating as usual in the meantime.”
One day after the SEC filed 13 charges against Binance, the world’s largest cryptocurrency exchange, and its founder/CEO Changpeng “CZ” Zhao, Coinbase dropped its charges. As well as misleading customers and misusing funds, Binance allowed some of its top traders to continue using its unregulated international exchange, according to the SEC.
Zhou is among the 60 richest people in the world and arguably the leader in crypto, according to Rolling Stone. Although he has a high profile, he has maintained a low profile — but that has changed in recent months, especially after Binance’s former main rival, FTX, collapsed and its co-founder Sam Bankman-Fried (who has pleaded not guilty to numerous fraud and campaign finance charges).
In a statement to Rolling Stone, Maryland Sen. Chris Van Hollen said, “Clearly CZ has been lurking in the shadows. It’s difficult to pin point where [Binance] operates, what they’re doing.” He added: “We just went through the [Silicon Valley Bank] collapse, which was regulated, at least some review process was in place. There is no information to be found in [Binance’s] case. This is a black box, so I worry about it going down. There could be a lot of money lost.”
