SEC Tells Coinbase: 'You Simply Can't Ignore the Rules Because You Don't Like Them.' But Coinbase Still Isn't Binance

The SEC has brought charges against two popular crypto exchanges in as many days. Yesterday, it accused Binance founder Changpeng Zhao, and several connected entities, of a laundry list of securities law violations. Today, it charged Coinbase with operating as an unregistered national securities exchange, broker, and clearing agency. It also said it failed to register its crypto staking program.

"You simply can't ignore the rules because you don't like them or because you'd prefer different ones; the consequences for the investing public are far too great,” said Gurbir S. Grewal, Director of the SEC's Division of Enforcement. In response, Coinbase CEO Brian Armstrong tweeted, "Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America."

The SEC's charges against Coinbase center around securities

It's several years since Gary Gensler took the helm of the SEC. But from the outset, he's said he believes many cryptocurrencies are unregistered securities. He thinks they are operating without the required oversight. Recent moves from the SEC reflect this belief.

If a product is a security, it comes under the umbrella of the SEC and there are strict rules about how it can be traded and share information. Platforms that trade securities need to register and follow SEC regulations. But, up until now, most cryptocurrencies have been considered commodities. These are regulated by the CFTC and the rulebook is different.

So, what constitutes a security? The SEC's argument is that a product is an investment contract if a person "invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." The SEC thinks this applies to cryptocurrencies that are run by foundations or other entities if they make statements that lead investors to think they could make a profit.

As a result, the SEC accuses Coinbase of operating an unregistered marketplace where people can trade securities. It says that Coinbase's failure to register means crypto investors have been deprived of investor protections. It also argues that Coinbase's staking-as-a-service program was not correctly registered.

Coinbase has hit back at the charges. Armstrong says the popular exchange has tried to register with the SEC. He also points out that the SEC reviewed its business and allowed it to become a public company in 2021. According to Armstrong, "The SEC and CFTC have made conflicting statements, and don't even agree on what is a security and what is a commodity."

In contrast, the SEC says Binance deliberately mishandled customer funds… as well as selling unregistered securities… and several other things

Timing aside, there are some similarities between the SEC's cases against Binance and Coinbase. Both are accused of operating unregistered exchanges and the unregistered offer and sale of securities. But that's where it ends.

The accusations against Binance go a lot further and are more concerning -- particularly if you're a customer of Binance or Binance.US. According to the SEC, "Zhao and Binance misled investors about their risk controls and corrupted trading volumes while actively concealing who was operating the platform."

The SEC says the companies involved lied about the controls in place to prevent market manipulation. Moreover, it accuses Sigma Chain, another company owned by Zhao, of carrying out wash trading on the platforms. Wash trading essentially involves buying and selling an asset to push up trading volumes and create an unfounded impression of demand.

The complaint also raises questions about the custody of crypto assets on Binance.US. It says customers don't know where their assets are stored. The SEC document warns this gives, "Zhao and Binance free reign to handle billions of dollars of crypto assets that customers have deposited, held, traded, and/or accrued on the Binance.US Platform with no oversight or controls."

What it all means for crypto investors

There are a lot of moving parts to crypto regulation. The SEC's charges come as key players, including Coinbase, testify in front of the House Committee on Agriculture on draft crypto legislation. We don't know what shape additional crypto regulation in the U.S. will take, nor do we know how the SEC's legal cases will pan out.

What's for sure is that the question of how to categorize and regulate crypto isn't going away. If you hold assets with Binance or Binance.US, it's worth reading the SEC's accusations in full. Binance has said it will defend itself vigorously and that client funds are safe. But given that we're talking about your money, it's important to understand the details so you can make up your own mind.

In the meantime, brace yourself for further volatility, whatever exchange you use. Cryptocurrencies are extremely risky investments. One way to protect yourself is to only invest money you can afford to lose. You can also minimize risk by ensuring your crypto is part of a diversified portfolio. If you currently only own cryptocurrency, the risk is that you'll lose everything if the industry fails. Consider also opening a brokerage account and exploring other assets such as stocks, bonds, or real estate. That way you won't have all your financial eggs in one basket.