If you are wilfully violating securities law, I have some advice: do not put “we are operating as a fking unlicensed securities exchange” in a message to another party, and if you absolutely must do so, do not say “bro” at the end.
Sadly this advice came too late for Binance and their founder Changpeng Zhao (aka CZ), who were charged with a “variety of securities law violations” by the SEC earlier this week. The SEC also cited the above quote (from a message sent in 2018 by Binance’s Chief Compliance officer) in a tweet announcing the filing of a vast enforcement action against Binance, alleging that Binance had operated as an unregistered exchange, broker and clearing agency.
In addition, the commission alleges that Binance illegally offered and sold crypto assets that the SEC considers to be securities, that they’ve failed to keep US investors on Binance US (the only place US investors can legally use Binance), and, of course, of outright misleading investors.
More damningly, Binance also mixed US investors’ funds with other consumer assets from the rest of the Binance empire, something that Mike Burgersburg of Dirty Bubble Media had raised the alarm around back in December 2022. CZ also directly misled regulators, claiming that Binance US was a wholly-independent company, despite the fact that CZ was, and I quote, “intimately involved” in the operations of Binance US.
Binance was meant to stop serving American customers back in 2019, and specifically said that it would work with BAM Trading Services, an allegedly independent institution, to form Binance US, an independent exchange. The 136-page complaint from the SEC alleges that BAM Trading and Binance US were intentionally created to evade regulatory insight (appearing to be divorced from the larger Binance empire) while BAM Trading’s then-CEO said that her “entire team felt like it had been duped into being a puppet.” CZ also worked diligently to make sure that valuable US customers were allowed to keep transacting on Binance.com, instructing the company’s employees to help said customers retain access in a way that, and I quote, was “to reduce the losses to ourselves (Binance), and at the same time to make the U.S. regulatory authorities not trouble us.”
More worryingly (and annoyingly missing from many articles on this enforcement action) is the allegation that Sigma Chain AG (an entity owned and controlled by CZ) engaged in wash trading — an intentional act of selling assets to oneself to artificially inflate the trading volume of assets on Binance US. Arguably the most astonishing claim by the SEC is that Binance and Binance US redirected over $12 billion of customer funds to CZ’s investment fund Merit Peak between 2019 and 2021. As a result, the SEC has also filed for a temporary restraining order to freeze Binance US’s assets for any use other than customer redemptions.
I cannot be any clearer that the fundamental fabric of this industry is built on fraud. It is built to further enrich the rich through deceiving the retail investor. It doesn’t matter if there are some “good guys” in your industry if the entire thing is held together by a cadre of quasi-criminal actors that believe the world’s governments should adjust regulations to make their scams easier to execute.
Coins, Debased
Wash trading and market manipulation (which Binance has been accused of before) are the dirty little secret of the crypto industry. Do you really think there are hundreds of billions of real dollars being transacted on the blockchain? Do you really think that Sam Bankman-Fried was the only person manipulating the market? Tether, the largest stablecoin, has been rumored to have been manipulating the price of Bitcoin for years, and the price of Bitcoin (or any other cryptocurrency) never seems to map to anything approaching real events or the validity of anything underlying a token. According to a 2021 study, one-third of Bitcoin is controlled by 10,000 investors, who can — and likely have — manipulate the market as they see fit to juice their holdings, as many leading cryptocurrencies are tied to BTC’s value.
In essence, a small group of rich guys can control the conditions under which you — and others — make money, and there is absolutely no way to regulate it, because the nature of transacting with these currencies is that they are borderless and (relatively) permissionless. Anyone can create a token, and anyone can transact with said token. The very existence of cryptocurrency is an attempt to circumvent securities laws — to transact outside of regulated securities exchanges, and to deprive retail investors of the protections that the government has created to regulate how securities are offered.
And this is the specific rationale behind the 101-page enforcement action that the SEC has filed against Coinbase, America’s largest and most-respectable cryptocurrency exchange. It specifically charges them with being an unregistered exchange, broker and clearing agency, and in particular targets Coinbase’s staking-as-a-service offering, which 10 state regulators are also targeting.
All of this is happening as a result of one very obvious fact: running a cryptocurrency exchange in America is illegal. To quote Bloomberg’s Matt Levine:
“A decent rule of thumb,” I wrote in March, “is that all cryptocurrency exchanges are doing crimes, and if you’re lucky your exchange is doing only process crimes.” Like:
Is your exchange operating an illegal securities exchange in the US? Yes! Yes it is! The view of the US Securities and Exchange Commission, at least, is that every crypto exchange in the US is illegal. You might disagree — plenty of crypto exchange executives disagree, and we will talk more about the arguments below — but realistically, if you are trading crypto, you simply cannot be too squeamish about strict adherence to US securities law.
Is your exchange stealing all of its customers’ money? It might be! Some are! Others are not! This is the one you should mostly care about, if you are a customer.
These things are not especially correlated because, again, every crypto exchange is violating US securities law. “Oooh I shouldn’t trust my money to those guys because they are violating US law”: Sure, yes, a reasonable position that would save you from a lot of crypto disasters, but also one that would prevent you from trading crypto entirely. Your choice!
If you are offering securities — which the SEC has been clear that many cryptocurrency tokens are — and you are an unregistered exchange, you are violating securities law. While one can argue that the SEC has been opaque with their guidance as to how one should register (as Coinbase has) the exchange still chose to operate despite it being patently obvious that doing so was, as the SEC has said, running an illegal securities exchange. It also absolutely is possible, as proven by Prometheum Capital successfully winning a special purpose broker dealer approval from the SEC (though they’re not allowed to deal with Bitcoin).
Once you sandblast away the rhetoric and complaining of a multi-billionaire and his cronies, what Brian Armstrong and Coinbase have done is fairly simple: they have, instead of waiting for approval, chosen to move ahead with something the SEC had repeatedly said was illegal.
They can whine about how unfair it is to “regulate by enforcement” (otherwise known as “enforce laws”), but the fact is that nobody forced them to run this company, and nobody forced them to keep running it in this way. Coinbase knew what they were doing — the SEC declared that DAO tokens were securities back in 2017, for example — they just chose to keep doing it because they either believed that the US government didn’t care (which they obviously did) or that the rules didn’t apply to them (which they obviously do).
The common refrain from the crypto crowd is that the SEC didn’t give Coinbase a chance — that they gave them an “icy reception” and wouldn’t tell them how to fit their operations into existing laws. The issue with this argument is that it is not the SEC’s job to tell people how to fit into securities law. They have absolutely no obligation to help Coinbase out, nor do they have to compromise with a company that has spent years biting their thumb at the agency. As David Barnard notes, Coinbase has understood that the Howey Test (which decides if something is a security) applies to tokens as far back as 2016, and Coinbase, again, could have taken the idea that they were potentially listing unregistered securities as a sign to maybe not list them at all.
The silver lining from this enforcement action is that Coinbase may, in the event they settle with the SEC (as they’re likely to do), get the cryptocurrency regulations they’ve so loudly demanded for the last few years. The question will be what kind of Coinbase comes out the other end — whether it will even support Ethereum, or Ethereum Tokens, or staking, or really any of the things that people want in a cryptocurrency exchange.
And said regulation — which would come in the form of a consent decree (meaning Coinbase agreed to it in exchange for the SEC not eating their souls) — would likely spell the end for cryptocurrency as a whole in America.
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And that’s the ultimate problem. There is no compelling reason for cryptocurrencies to exist. They are slower than real currency. They are easily and routinely manipulated by shadowy parties. And the SEC — through Chairman Gary Gensler — has made it clear that America doesn’t need cryptocurrency at all. That’s an understatement.
Cryptocurrency has done unimaginable harm to anyone that invested around the Super Bowl, when prices were at a historical peak, or the millions of people that have been scammed by Sam Bankman-Fried and FTX alone. People like Brian Armstrong or co-brothers Tyler and Cameron Winklevoss created large, illegal securities exchanges, making billions of dollars off of them while exposing retail investors to an unregulated monetary hellscape manipulated by other rich freaks.
The real irony is that much of this wouldn’t have come to a head if Changpeng Zhao didn’t have a personal grievance with Sam Bankman-Fried:
He also didn’t realize that his best scenario would be to keep Bankman-Fried and FTX’s problems as quiet as possible. A smart man would’ve realized that FTX dying - and in a graphic and detailed way, too - would cause a cascade effect that ended with the world treating cryptocurrency exchanges with concern and disdain, all while the slow hand of the US government finally moved to strike. But CZ couldn’t help himself.
Perhaps it’s a little much to say this, but I truly think that Sam Bankman-Fried’s fall from grace may have been the catalyst for a dramatic change in the world’s perception of tech.
Everybody knew that cryptocurrency was bullshit from day one, but people were desperate and wanted some way to accrue wealth in a world where doing so otherwise felt impossible. The 2021 crypto bull run created the conditions under which regular people believed tech had allowed them to get in “on the ground floor,” only for it to be taken away in a graphic, ugly fashion, destroying anyone that invested any time after February 2022. The revelation of the FTX fraud made it abundantly obvious that there was never going to be another bull run.
All of this happened as cryptocurrency attached itself to the specious metaverse hype cycle, where a drunken tech industry attempted to shove complete nonsense down consumers’ throats, believing that regular people were stupid and would buy anything.
The tech industry hitched its ride to two losing concepts, and one of them turned out to be an unimaginably huge scam that would destroy billions of dollars of retail investors’ capital along with several banks.
Silicon Valley has now become synonymous with poorly-allocated capital enriching ghouls rather than creating any kind of value to society, and I’m confident that cryptocurrency is to blame.