SEC Charges Binance with Securities Law Violations
Commentary by Steven Lofchie
The SEC charged Binance Holdings Limited -- the largest international crypto asset trading platform -- along with its beneficial owner and affiliated entities, with numerous violations of the securities laws.
In a Complaint filed with the District Court for the District of Columbia, the SEC described the defendants as having "blatant disregard" for securities laws that placed investors’ assets at "significant risk." The SEC stated that the Binance platform (the "Platform") (i) unlawfully offered exchange, broker-dealer and clearing agency services without registering with the SEC, (ii) engaged in unregistered offers and sales of crypto asset securities while depriving investors of material information regarding risks and trends affecting their investments and (iii) made misrepresentations to investors while attracting "billions of dollars" in investor trading volume.
The SEC charged that the Platform was an effort to evade U.S. regulatory oversight. The SEC said that the Platform created entities in the United States which it claimed "independently controlled the operation of [the Platform]." In addition, the SEC asserted that the Platform purported to not serve U.S. persons but engaged in various stratagems of concealment to maintain its most valuable U.S. customers.
As a result, the SEC claimed that the Platform violated Securities Act Sections 5(a) and (c) ("Prohibitions relating to interstate commerce and the mails"); Exchange Act Sections 5 ("Transactions on unregistered exchanges"), 15(a) ("Registration and regulation of brokers and dealers") and 17A(b) ("National system for clearance and settlement of securities transactions") and Securities Act Section 17(a)(2) and (3) ("Fraudulent Interstate Transactions").
To settle the charges, the SEC requested that the Court order a (i) permanent enjoinment against further regulatory violations, (ii) disgorgement of any ill-gotten gains, (iii) civil monetary penalty and (iv) permanent bar against the owner, and enjoinment against all associated entities from engaging in the sale of securities.
Commentary
The problems with the SEC's position are of policy and process, more than that of law. The new charges raise many questions. If the SEC is of the view that Binance's conduct is illegal, why is it just taking action now? Binance is hardly low profile. Did something new come to the attention of the SEC? What other factors led to the timing of the SEC's charging decision?
It is problematic for the SEC to assert that Binance should have been registered in numerous capacities, when the SEC's rules make it impossible for any crypto trading business to register and stay in business. Either the SEC should have amended its rules to fit the product early on, or the SEC should have stated directly that it would not do so, thereby, making it impossible for any crypto firm to do business legally. Instead, there was an apparent pretense that it was somehow possible for the crypto trading business to be carried out legally, and that firms were simply deciding not to do so. (While it is true that the SEC has brought numerous enforcement actions in the digital asset space, the great majority of these are matters of clear cut fraud, and thus do not serve in any meaningful way to establish law.) The end result of the SEC's approach is that rather than shut down, firms decided to take their chances. This did not play out well, at least in the case of FTX.
Had the SEC either (i) established workable procedures, (particularly as to custody of digital assets which is where the biggest losses are likely to be and ones that seem absolutely preventable if broker-dealers or banks had been permitted to act as custodians) or (ii) simply announced that it was in a state of war against digital and gone after the big players much earlier, investors would have been better protected.