What do SEC’s charges against Binance mean for crypto?

Rebecca Watson Date published: Jun 06, 23

The civil charges brought against Binance by the US Securities and Exchange Commission (SEC) yesterday (5 June 2023) have sent more waves through the financial world. As reported in the New York Times, the SEC has accused Binance, the world's largest cryptocurrency exchange, and its CEO Changpeng Zhao of allegedly violating US securities laws.

What’s happened so far?

The full terms of the alleged violations are extensive – a full 136-page complaint, filed with Federal District Court in Washington – but in brief, according to the SEC, Binance failed to register with the agency before offering its stock token services to US investors. Additionally, the SEC accuses Binance of operating an unregistered national securities exchange and acting as a unregistered broker-dealer and clearing agency.  The question of whether cryptocurrency is a security is still open to interpretation under U.S. federal securities law.  SEC maintain that these tokens are securities, and therefore subject to federal securities laws.   Binance, however, argues that the tokens are an ‘internal economy’, and the value of each token is dependent on the value that internal community want to give it.  

In response to the SEC's charges, Binance released a statement expressing disappointment in the SEC's decision and vowing to “vigorously defend our business and the [cryptocurrency] industry”.

Why has SEC taken action?

The crux of the issue comes down to whether the tokens offered by Binance meet the legal definition of securities. Under US law, a security is broadly defined as any investment product that involves the investment of money in a common enterprise, with the expectation of profits primarily from the efforts of others. The SEC argues that Binance's stock tokens meet this definition, and therefore should have been registered with the agency before being offered to US investors.

Binance, on the other hand, argues that the tokens do not meet the legal definition of securities because they are not tradable on secondary markets and are only available to users of Binance's virtual platform. The company also contends that its stock tokens are not subject to US securities laws because they are issued and traded outside of the United States. Binance has long argued that it is not subject to US laws because it does not have a physical headquarters in America.

What does this mean?

The implications of the SEC's decision to charge Binance are significant, both for the company and for the wider cryptocurrency industry. If the SEC's claims are upheld, it could result in fines, legal action, and reputational damage for Binance. It could also lead to increased scrutiny of other cryptocurrency platforms offering similar services and set a precedent for them to comply with regulatory requirements.

The SEC's move to charge Binance emphasizes the role of financial regulators in promoting fair trading practices, safeguarding investors' funds, and ensuring stability in the financial world. While some view Binance's activities as outside the rules, others see them as innovative and disruptive. Only time will tell if the SEC's assertions, that that they may have operated outside regulatory requirements, are justified. Until then, the old and 'new world' money watch with interest