SEC cracks down on US crypto sector with one lawsuit after another

(updated on Nov 29 to include Binance settlement, new enforcement action against Kraken)

The US regulator has over the past months tightened its grip on the US market. Crypto exchanges, crypto payment providers and individuals are one after the other accused of trading unregistered securities in violation of securities laws. Binance, Coinbase, Ripple, Grayscale, Bittrex and Justin Sun are just a few of those targeted.

The regulatory approach to crypto assets has significantly varied from country to country since the emergence of the first crypto assets nearly 15 years ago. Some countries are more permissive and encourage innovation, while others take a much more restrictive approach.

The Securities and Exchange Commission (SEC) definitely falls into the latter category. Initially, the US regulator refrained from much intervention, issuing occasional statements and warnings about the potential risks related to cryptocurrencies. But in 2016, when the decentralized autonomous organization (DAO) was hacked, the first signs of a more restrictive approach emerged. A clampdown on initial coin offerings (ICOs) began as of 2017.

The collapse of Sam Bankman-Fried’s crypto exchange FTX in November 2022 further reinforced the SEC’s regulatory strategy of ruling through enforcement actions. By November 2023, the SEC had brought forth more than 130 enforcement actions against crypto asset players, the list of cases on the commission’s website shows. The SEC has settled with some of the targeted firms and individuals, while lawsuits are ongoing in other cases. Let’s have a look at the main pending cases.

Ripple Labs expected to strike settlement deal after partial win in court

In December 2020, the SEC filed an enforcement action against Ripple Labs as well as its CEO Bradley Garlinghouse and its co-founder Chris Larsen. The regulator claimed that they had raised over 1.3 billion dollars through an unregistered, ongoing digital asset securities offering in 2013.

"We allege that Ripple, Larsen, and Garlinghouse failed to register their ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple's business and other important long-standing protections that are fundamental to our robust public market system," the SEC said at the time.

Ripple won a partial victory in July 2023, when Judge Analisa Torres classified XRP as a commodity when sold on the open market to retail investors – not as a security as claimed by the regulator. XRP, which had continued to trade on non-US exchanges during the ongoing court case, were relisted on Coinbase and Kraken following the July ruling.

The SEC’s appeal of the July ruling was rejected by the judge in early October. A couple of days later, the SEC announced it voluntarily dropped its case against the two Ripple executives with no settlement involved.

But the case is not over, as Judge Torres also ruled that XRP classifies as a security when sold directly to institutional investors. The SEC thus wants to impose a 770 million dollar fine for these illegal XRP sales. Experts believe the SEC will end up offering Ripple a settlement deal where the actual penalty will be far lower.

The final act of the lawsuit is scheduled for April 23. Its outcome may have wide-ranging repercussions on the entire cryptosphere, including the world’s largest centralized crypto exchanges Binance and Coinbase. Both were sued by the SEC in June 2023.

Binance in $4.3 billion settlement with US authorities

Binance, the world’s largest crypto exchange with a global market share exceeding 40 percent, was sued by the SEC on June 5. The regulator accused the exchange as well as its founder and CEO Changpeng Zhao (CZ) for alleged violations of securities laws, for misleading investors, corrupting trading volumes and much more.

On Nov 21, Binance reached a 4.3 billion US dollar settlement with the US Department of Justice, the Treasury and the Commodities Futures Trading Commission (CFTC). The world’s largest exchange admitted it had engaged in anti-money laundering, operated an unlicensed money transmitting business, and violated sanctions. US Treasury Secretary Janet Yellen pointed out that 100,000 transactions supporting terrorism, drug dealing and violating sanctions imposed by the US had been traced to Binance.

The CEO of Binance, Changpeng Zhao (CZ), stepped down with immediate effect after having pleaded guilty to the money laundering charges brought against him. CZ, whose net worth is valued between 15-25  billion dollars, also agreed to pay a 50 million dollar fine.

CZ has been temporarily barred from leaving the US ahead of his sentence hearing scheduled for Feb 23. He faces a prison sentence of a maximum of 18 months given he waived his right to appeal.

To the surprise of many, the SEC is not part of the multibillion settlement.

Coinbase to meet SEC in court in January

 One day after Binance, it was the largest US centralized crypto exchange’s turn to be sued by the SEC. Coinbase was charged for operating as an unregistered securities exchange, broker, and clearing agency, and for the unregistered offer and sale of securities in connection with its staking-as-a-service program.

“Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law,” the SEC said at the time.

Prior to this move, the regulator had requested Coinbase to delist all of its more than 200 tokens, with the exception of Bitcoin. “We said, well how are you coming to that conclusion, because that’s not our interpretation of the law. And they said, we’re not going to explain it to you… We really didn’t have a choice at that point, delisting every asset other than bitcoin… It kind of made it an easy choice . . . let’s go to court and find out what the court says,” the company’s CEO Brian Armstrong is quoted as saying by the Financial Times.

Coinbase has since offered to register parts of its business to allay the concerns of the regulator and also requested that the SEC identify which of the cryptocurrencies available on the exchange classify as securities. The SEC has not responded.

The crypto exchange thus filed a motion to dismiss the case on Aug 4. “Our core argument is simple – we do not offer ‘investment contracts’ as that term has been construed by decades of Supreme Court and other binding precedent. The court has set oral argument on our motion for January 17, 2024,” Coinbase said in its third quarter shareholder letter.

Kraken faces fresh charges, despite settlement with the SEC less than a year ago

Ten months after the US crypto exchange Kraken settled with the SEC for a 30 million US dollar fine and agreed to cease its staking services, the SEC hit once more. On Nov 20, the US regulator slapped another lawsuit on Kraken, claiming it operates as an unregistered national securities exchange, broker and clearing house. The SEC’s lawsuit designates a number of crypto tokens as securities, including Solana, Cardano and Polygon in the charges. Kraken is currently the third-largest crypto exchange in terms of trading volumes, behind Binance and Coinbase.

High crypto adoption in the US despite the regulatory uncertainty

The US crypto market nevertheless remains the world’s second largest in terms of crypto adoption, behind Australia, despite the regulatory risks. A sixth of the Americans last year either owned or used cryptocurrencies, compared to a tenth in 2020.

 “This is no surprise as some of the biggest crypto exchanges such as Coinbase and Kraken reside in the US... Meanwhile, the US by far leads the charge for cryptocurrency infrastructure with more than 30,000 more crypto ATMs than any other country,” it said in its Global Crypto Adoption report.

Foto: Thirdway