The recent lawsuit filed by the Securities and Exchange Commission (SEC) against Binance Holdings Limited has shed light on the extent of the SEC’s enforcement efforts in the crypto industry. The SEC has consistently emphasized that crypto enforcement is among its top priorities, and this lawsuit against Binance reaffirms this commitment.
In the year 2022, the SEC brought a total of 30 cryptocurrency-related enforcement actions, which marked a 50% increase from the previous year. The first half of 2023 indicates that the SEC is on track for another significant increase in enforcement actions compared to the previous year. Gary Gensler, the SEC Chair, expressed his concern about the crypto industry, stating that he has never seen a field so built upon non-compliance with the law, referring to the business model of many crypto-related companies.
The Binance lawsuit serves as an illustration of the SEC’s approach to litigating alleged non-compliance on a large scale. The SEC is taking a utilitarian approach by comparing the functions and participants in the traditional securities industry with their counterparts in the crypto industry. Binance Holdings Limited, the lead defendant in the lawsuit, is a Cayman Islands-based company that operates the binance.com platform, which serves customers in over 100 countries.
The SEC expects professionals participating in the securities market to adhere to significant regulatory oversight. Brokers and dealers must register with the SEC, and any organization that provides a marketplace for securities trading must also register with the SEC. Furthermore, companies offering securities for sale are required to file a registration statement with the SEC, providing comprehensive disclosures about the company and its securities.
The Binance lawsuit alleges that the company was well aware of these regulatory requirements but engaged in an extensive scheme to conceal its US customer base. Binance manipulated its KYC (Know Your Customer) processes to avoid US regulations, encouraging US-based customers to bypass restrictions through the use of virtual private networks (VPNs) to hide their locations and minimize the impact of Binance’s public statements prohibiting US investors. Binance also failed to require all customers to submit KYC documents until August 2021.
Binance is now facing eleven claims for various violations of the Exchange Act, including the unlawful sale of securities, acting as an unregistered exchange, broker-dealer, and clearing agency, and securities fraud. The SEC brings the securities fraud claim under Section 17(a)(2) of the Securities Act, which does not require scienter (intent) and can be established if the defendant acted negligently.
With the recent announcement that the Supreme Court will address the Chevron doctrine, which gives federal agencies the authority to interpret vague statutes, there may be potential implications for the SEC’s rulemaking authority in the crypto space. While this may not directly impact the SEC’s classification of cryptocurrencies as securities, as it is based on Supreme Court precedent, it could shape future litigation and rulemaking in the industry.
the SEC’s lawsuit against Binance demonstrates the agency’s commitment to enforcing regulations in the crypto industry. The case highlights Binance’s alleged non-compliance with various securities laws and the SEC’s determination to address such issues. As the crypto industry continues to evolve, regulatory scrutiny and enforcement actions are likely to increase, emphasizing the importance of compliance for companies operating in this space.