On Monday, the US Securities and Exchange Commission charged cryptocurrency exchange Binance and its co-founder and CEO Changpeng Zhao with 13 securities law violations including misleading investors, fraud, and market manipulation.
The lawsuit is the culmination of months of investigation into the world’s largest cryptocurrency exchange and struck an immediate blow to the market: Bitcoin, one of the most highly traded cryptocurrencies, fell to its lowest price since March.
Binance responded Monday that it would “defend [the] platform vigorously” and denied any allegations that assets on Binance platforms were ever at risk.
If the case goes to court, it may result in a total upheaval in how some of the most popular cryptocurrencies, including MATIC and solana, are bought and sold. And it could make it much harder for the crypto investors currently holding those tokens to sell them off.
The Binance lawsuit is the latest development in a series of high-profile blows to the industry following the collapse of rival FTX seven months ago. Several smaller cryptocurrency exchanges, like Kraken, have faced similar legal battles from the SEC so far this year and have settled in those cases.
So far, none of those exchanges have taken their cases all the way to the courts—but the Binance suit, or an anticipated suit against Coinbase, may finally land on a judge’s desk. “I don’t believe that Binance or Coinbase will want to settle,” PitchBook analyst Robert Le said. “That will ultimately be good for the industry because it’ll go to the courts, then the courts will decide if they’re securities or not.”
If Binance did settle, it could likely be banned from operating in the US and forced to pay a hefty fine. The SEC has also indicated that it is anticipating enforcement action against Coinbase, via a recent Wells Notice.
Among the 10 cryptocurrencies listed by the SEC as unregistered securities are solana, BNB, and MATIC, the native token of Polygon. “[The SEC’s] ultimate goal seems to be to say that the majority of tokens out there are securities,” Le said, so that they’re easier targets for regulation.
But what that means in practice isn’t entirely clear. The SEC would need to create a registration process for these tokens, but there’s no precedent for something being deemed a security after already trading on the free market for years, according to Le.
Exchanges like Coinbase would have to delist those tokens as well, which would have far-reaching impacts for crypto investors. Those tokens would immediately drop substantially in value because they’re suddenly unregistered, and the tokens would lose a significant portion of their liquidity. Investors would have to turn to the international market to sell them, Le said.
Cryptocurrency startups had a rocky start to 2023, raising just $2.6 billion in VC funding globally across 353 deals, an 11% drop from the previous quarter, according to PitchBook’s Q1 2023 Crypto Report. It’s a sobering outlook in an already tough fundraising environment, but some prominent investors, like Andreessen Horowitz’s crypto fund, are still staying bullish on the industry.
The high-stakes world that many crypto founders live in has seen several dramatic downfalls and reputations undone over the last seven months. The SEC’s lawsuit highlights one exchange back in 2018 between Binance’s chief compliance officer and another compliance officer: “We are operating as a fking unlicensed securities exchange in the USA bro.”
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