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Analysis
06 Jun 2023

SEC's cases against Binance and Coinbase explained

In this piece, we summarize the overlap and differences between the two cases in the easiest possible fashion.
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This week, the SEC sued the world's two largest crypto exchanges, Binance and Coinbase. It's easy to pool the two cases together, but the severity of the individual cases is wildly different. The accusations against Binance are for serious criminal actions, while the case against Coinbase is a matter of whether cryptocurrencies should be defined as securities or commodities.CoinbaseThe best way to explain the overlap and differences between the two cases in more (but still short) detail is to start with the SEC's case against Coinbase. The allegations in the Coinbase case are straightforward. In simplified terms, Coinbase is charged with operating an unregistered securities marketplace in the US.The case against Coinbase depends on the yet undefined classification of the different cryptocurrencies as securities, commodities, or something else. No crypto exchanges in the US are registered securities exchanges, so these charges apply to all US crypto exchanges.BinanceOver to the case against Binance: Binance is also charged with operating an unregistered securities marketplace in the US. But the allegations against Binance don't stop there. They are also charged with:
  • Intently circumventing American law by funneling US users to Binance.com
  • Market manipulation and wash trading to enrich themselves.
  • Comingling Binance.US funds with Binance.com funds and the mismanagement of these funds
These additional charges against Binance are not matters of definition and are serious allegations. Due to the severity of the allegations, the SEC has filed a motion to freeze all Binance funds to protect customer funds.Our takeK33 Research note on the allegations of mismanagement of customer funds by Binance:The thoughts quickly go to FTX when hearing of a crypto exchange mismanaging customer funds. In the case against Binance, there is no proof or indication of Binance not having 1-1 backing of the relevant cryptocurrencies for all customer funds. The case, however, shows that funds are, in practice, pooled for entities that should be independent and that Binance CEO Changpeng Zhao possibly controls all these funds in the extreme case.
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