‘Fundamental Difference’ Between SEC’s Binance, Coinbase Suits

The SEC slapped both Binance and Coinbase with weighty lawsuits within 24 hours — but their content appears to hinge upon markedly different legal arguments.

The US securities overseer also had to adopt its legal positioning to the complex structure of both crypto exchanges.

The SEC claims that Coinbase and the exchange’s holding company violated five laws, while Binance’s suit claims 13 violations. In addition to Binance, SEC attorneys named CEO Changpeng “CZ” Zhao as a defendant, along with BAM Trading Services and BAM Management US Holdings.

Philip Moustakis, a partner at New York-based law firm Seward & Kissel, told Blockworks that “the fundamental difference” between the two cases is that the SEC hit Coinbase with a “straight registration violations case.”

The SEC’s Binance lawsuit, meanwhile, filed on Monday one day prior to the regulator’s Coinbase action, contains a number of more complex allegations — which could be tied to more weighty consequences.

“The Binance suit, in addition to registration violations, includes allegations of fraud, market manipulation, commingling of investor funds, diversion of investment funds,” Moustakis said. “So they are different cases.”

Brian Armstrong, CEO of Coinbase, also clarified that the cases were different in a tweet Tuesday afternoon.

“In case it’s not obvious, the Coinbase suit is very different from others out there – the complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law,” Armstrong tweeted.

Both Binance and Coinbase have pushed back against their respective lawsuits.

“We respectfully disagree with the SEC’s allegations,” Binance told Blockworks in a statement. The exchange also denied that it “operated as an unregistered securities exchange or illegally offered and sold securities, including by offering BNB, or the BUSD fiat-backed stable coin.”

Latest SEC move against Binance, Coinbase

Both Binance and Coinbase have faced US legal action this year. Coinbase is currently locked in a legal battle with the SEC after it was served with a Wells notice in March.

Coinbase then sued the SEC for clarity. When a court ordered the SEC to respond, the SEC said, “deliberating over the kind of significant changes sought by Coinbase, which could affect both crypto assets and the securities markets more generally, takes time.”

Binance was targeted by the Commodities Future Trading Commission in a March 27 suit, with the CFTC directly naming Zhao and former chief compliance officer Samuel Lim.

The action said that the exchange had unlawfully “operated a facility for the trading of futures, options, swaps, and leveraged retail commodity transactions involving digital assets that are commodities” for US customers.

Here’s a look at the differences — and similarities — between the SEC’s most recent lawsuits.

Coinbase

In Coinbase’s lawsuit, the SEC is targeting Coinbase for allegedly operating as an unregistered exchange and offering unregistered securities.

The bulk of the 101-page doc focuses on 13 purported securities: SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO.

Though several overlap with those listed in the Binance suit, the SEC delineates its arguments for deeming the cryptoassets securities in both legal actions.

For example, Polygon’s native token, MATIC, is named in the suit — with the SEC using a 2021 tweet from Sandeep Nailwal, the protocol’s founder, as evidence that the “founders of Polygon continue to promote the platform through various social media.”

The two main allegations in the suit appear to fall closely in line with the SEC’s plan for Binance. The targeting of both exchanges’ staking services is also quite similar.

Here are the specific violations that the SEC names in the Coinbase suit:

• Section 5 of the Exchange Act, stating that Coinbase meets the criteria of an exchange and did “effect transactions in a security, or to report any such transaction, without registering as a national securities exchange.”
• Section 15(a) of the Exchange Act, stating that Coinbase “is a broker and made use of the mails and the means and instrumentalities of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, securities, without registering as a broker, and without being exempted from such registration.”
• Section 17A(b): Coinbase is said to have performed “the functions of a clearing agency with respect to securities, without registering” as required by The Exchange Act.
• The suit claims that CGI violated sections 5, 15(a), 17A(b) of the Exchange Act as the controlling company behind Coinbase.
• Coinbase allegedly violated Section 5(a) and 5(c) of the Securities Act through the Staking Program by selling unregistered securities.

Binance

Like Coinbase, the staking program operated by Binance.US is in the SEC’s crosshairs.

“Since at least 2017, Binance and BAM Trading further violated the federal securities laws by illegally conducting unregistered offers and sales of securities to U.S. investors — in Binance’s case, the offers and sales of BNB, BUSD, Binance’s ‘BNB Vaul’” program, and Binance’s ‘Simple Earn’ program, and in BAM Trading’s case, the offer and sale of its staking-as-a-service program,” the suit alleges.

The SEC claims Binance and BAM Trading “have engaged and continue to engage in unregistered offers and sales of crypto asset securities.”

BNB and BUSD — Binance’s native tokens — are targeted alongside 10 tokens, which include SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI.

But the bulk of the lawsuit against Binance targets alleged internal fraud.

“Zhao directed Binance to assist certain high-value U.S. customers in circumventing those controls and to do so surreptitiously because—as Zhao himself acknowledged—Binance did not want to ‘be held accountable’ for these actions,” the filing claims.

It also cites multiple unnamed executives in the suit, including a chief compliance officer who reportedly said, “We are operating as a fking unlicensed securities exchange in the USA bro.”

They also said, “we do not want [Binance].com to be regulated ever.”

Here are the specific violations that the SEC names in the Binance suit:

• Section 5(a) and 5(c) of the Securities Act specifically against Binance for the unregistered sales of BNB.
• Section 5(a) and 5(c) of the Securities Act, again against Binance, for unregistered sales of BUSD.
• Binance also allegedly violated sections 5(a) and 5(c) of the Securities Act for its sale of Simple Earn and BNB Vault.
• Section 5(a) and 5(c) violations against BAM Trading for its Staking Program.
• Section 5 of the Exchange Act, stating that Binance.com did not register as an exchange.
• Section 15(a) of the Exchange Act for Binance not registering Binance.com as a broker-dealer.
• Section 17A(b) of the Exchange Act for Binance “failing to register” Binance.com as a clearing agency.
• Section 5 of the Exchange Act for both Binance and BAM “failing to register” Binance.US as an exchange.
• Section 15(a) of the Exchange Act for BAM Trading not registering Binance.US as a broker.
• Both BAM Trading and Binance allegedly violated 17A(b) by not registering Binance.US as a clearing agency.
• CZ allegedly violated Sections 5, 15(a) and 17A(b) of the Exchange Act as the “control person over Binance for the Binance.com Platform”
• Another violation of Sections 5, 15(a) and 17A(B) against CZ as the “Control Person over Binance and BAM Trading for the Binance.US Platform Violations”
• Sections 17(a)(2) and 17(a)(3) of the Securities Acts were allegedly violated by Bam Management and BAM Trading “engaged in one or more transactions, practices, or courses of business which operated or would operate as a fraud or deceit upon the purchaser.”