Is Crypto a Security and Is Binance the Next FTX?
Over the past two consecutive days, the Securities Exchange Commission (SEC) has filed lawsuits against Binance and Coinbase.
Regarding Coinbase, the SEC alleges that the platform has engaged in unlawful exchange operations without proper registration and regulation by the SEC.
Additionally, the SEC has alleged that the majority of cryptocurrencies traded on Coinbase should be classified as securities and subjected to regulation in accordance with the Securities Act. This would entail the obligation to furnish investors with a prospectus containing comprehensive details.
The ongoing dispute regarding whether cryptocurrencies should be classified as securities remains unresolved. It seems unlikely that a consensus definition will be reached even as Coinbase and Binance face legal action.
According to the SEC, a crucial factor in determining whether a cryptocurrency is a security is its level of decentralization. If a project is relatively centralized, it falls under the definition of an enterprise and should be treated as a security. However, if a cryptocurrency is decentralized, it is deemed not to be a security.
To be fair, Coinbase has expressed a willingness to be regulated. The platform seeks a fair regulatory framework for cryptocurrencies and clear guidance from the SEC regarding what is considered legal and what is not. However, the SEC's imposition of securities laws on the relatively unexplored territory of cryptocurrencies may not be entirely relevant.
It is important to highlight that the SEC had previously granted approval for Coinbase's initial public offering (IPO), fully aware that the company operates as a cryptocurrency exchange. However, the recent accusation that Coinbase is conducting exchange activities without the required license contributes to the perplexity surrounding the SEC's position. The question arises as to why the IPO was approved if Coinbase's operations were deemed illegal.
While I believe that regulation is necessary to protect the public, I agree with Coinbase's position that a comprehensive framework specifically tailored to cryptocurrencies should be established, rather than applying existing securities laws. It has been six years since the initial coin offering (ICO) issue arose, and yet we have seen little progress in the development of new legislation. Suing Coinbase and Binance will not solve the underlying problem.
In the case of Binance, the accusations were of a more severe nature, reminiscent of the FTX incident. The SEC lodged allegations against Binance and its founder, Changpeng Zhao (CZ), asserting that they had misappropriated customer funds by redirecting them to a trading entity called Sigma Chain, as well as a third-party company named Merit Peak. Both Sigma Chain and Merit Peak were under the control of CZ.
This scenario bears striking resemblance to the FTX case, where a significant portion of customers' funds were lent to a trading firm controlled by Sam Bankman-Fried, known as Alameda Research. Ultimately, both FTX and Alameda Research filed for bankruptcy.
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