On Monday, the Securities and Exchange Commission (SEC) announced charges against the popular San Francisco-based cryptocurrency platform Kraken for operating as an unregistered securities exchange and broker-dealer and reaping hundreds of millions of dollars in unlawful profits.
Then, on Tuesday, more news came that rocked the crypto and financial markets: Changpeng Zhao, commonly known as “CZ,” pled guilty to charges of money laundering in a Seattle federal court and said he would step down as CEO of Binance, the leading global crypto exchange since the demise of its rival FTX in November 2022. He will also pay a staggering $4.3 billion fine.
In just a couple of days, regulators made separate moves against and wrung concessions from a pair of firms that have stood, along with Coinbase, as among the most prominent and profitable crypto exchanges in the world.
The double-punch against the digital assets industry has few parallels in modern-day SEC enforcement, even during the tenure of its current chair, Gary Gensler, who has publicly blasted the crypto sector as “rife with fraud, rife with hucksters” and taken a highly aggressive stance against industry players.
Charles Slamowitz, a lawyer who advises both plaintiffs and respondents in regulatory enforcement actions, told The Epoch Times that his office has been swamped with inquiries about the implications of this week’s developments.
“There has been a spike in calls to our law firm in just the last day,” he said.
Recovering From SEC v. Ripple
The context of these developments is a year full of significant victories for, as well as humiliating defeats of, the regulators in high-profile legal battles.The timing does not look accidental, legal professionals who work in the cryptocurrency sector have told The Epoch Times. They fall just days after a jury in a federal courthouse in Manhattan, following four hours of deliberation, on Nov. 2 found FTX founder Sam Bankman-Fried guilty of an array of charges including securities fraud, wire fraud, and money laundering.
Taken together, these developments help enforce in the public mind the image of Gensler’s SEC as a ruthless anti-crypto enforcer, the legal experts say. They may also help assuage the regulator’s self-image. Mr. Gensler, and his agency, may still have been smarting from Judge Analisa Torres’s ruling in July in favor of Ripple Labs, which had been the target of a long-running SEC lawsuit alleging that Ripple’s XRP token was a security and, hence, that any purchase, sale, or trading of the token properly fell under the SEC’s purview.
In a 34-page ruling, Judge Torres found that the SEC had failed to prove its case that the trading of XRP on public exchanges involved an investment contract, part of the definition of security under the 1946 Howey Test. XRP, therefore, was not a security when it traded on public exchanges.
The markets hailed the decision as a monumental victory for crypto. In its aftermath, XRP’s value rose 37 percent, and both Kraken and Coinbase announced that they would re-list the token, after having de-listed it as the litigation played out.
The SEC not only resents Kraken for taking a decision explicitly counter to its longstanding guidance but also is under pressure to send a broad message to the digital asset and fintech markets, lawyers active in these spheres have told The Epoch Times. In spite of its Ripple setback, the agency may have felt significantly emboldened by the Nov. 2 decision in the Bankman-Fried trial.
Res Judicata
Last February, Kraken and the SEC reached a $30 million settlement for alleged securities law violations, but this did not stop the regulator from coming back with a new complaint and a new lawsuit, Mr. Slamowitz noted.The experience of Kraken, which may have thought it resolved its issues with the SEC long before Monday’s news of fresh charges, suggests that the regulator is willing to find grounds to come back and pursue new action against those who have evaded its enforcement actions in the past, Mr. Slamowitz suggested.
“Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding Kraken accountable for its misconduct and sending a message to others to come into compliance,” Mr. Grewal stated.
None of this is lost on Binance, Mr. Slamowitz suggested. Even if Mr. Zhao did not step down and Binance successfully took on the SEC in court, as Ripple managed to do, that might not spell the end of the exchange’s troubles with the regulators.
Grounds for New Charges
In the case of Sam Bankman-Fried and FTX, the respondent was highly vulnerable to charges of having commingled funds. Given the operational realities of other crypto exchanges, it can be practically impossible for them to prove that no commingling of any kind has ever happened, Mr. Slamowitz said.“Right now, it doesn’t look like jail time, but I think CZ, and the industry, realize that they could always get sued again. It’s possible the SEC could come back and fine Binance again for a lot of different things. This [breeds] an impermanence that is not good for industry predictors,” he said.
The timing of developments in the Binance legal drama should not be lost on anyone, he continued.
“It could be coincidence, but the fact that it came right before Thanksgiving, that he strikes a deal now, will be talked about around Thanksgiving tables, and sometimes family members like to ask people involved in crypto how they are doing. The timing is perfect,” he said.
“They essentially went after Goliath, once it was clear that FTX didn’t have the firepower” to defeat the regulators in court, added Mr. Slamowitz.
Many people in the crypto sector have voiced concerned to Slamowitz and other lawyers about what this week’s news portends. For their part, the exchanges have reacted in different ways. Kraken has made a public statement denying that it holds any assets on its books requiring registration, while Coinbase has expressed willingness to work with regulators but complained about the difficulties of meeting certain filing requirements, Mr. Slamowitz noted.
The news this week has cemented the SEC’s stance of “regulation by enforcement,” he said.
In the case of Binance, the SEC may have acted on a strong need to make an example of the high-profile Mr. Zhao, who has become something of a household name in the crypto space, believes Cal Evans, managing associate of Gresham International, a London-based digital asset legal and compliance firm.
“It is common to see founders or those in charge stepping down when faced with allegations of securities breaches. Removing the ‘bad actor’ from running a firm is a primary motivation for the SEC and other regulatory bodies. Essentially, it would send the wrong message if someone could breach securities laws, then continue working as the head of a firm after doing so,” Mr. Evans told The Epoch Times.
Regulatory Insecurity
This kind of high-profile action can make regulators look good, fostering the impression that they are going after the bad actors, but in some cases the victories may be more psychological than practical and may yield little in the way of curbing risk and promoting stability in the markets, believes Mr. Evans. Though, admittedly, the financial markets may respond positively in the short term, he said.“The SEC has become fully ‘weaponized’ in its treatment of crypto firms with little regard to any actual ‘consumer protections,’ which is their primary job. The reality is that obtaining these types of ‘wins’ boosts the U.S. economy with very little work,” Mr. Evans stated.
“The SEC and other regulators could have taken action years ago, but actively decided not to. Some argue that the timing is coincidental, others say it is more strategic,” he added.
Mr. Evans believes that the SEC was smarting after its humiliating loss in the Ripple court battle, and needed a symbolic victory to assure itself that it is not ineffectual.
“I think the SEC needed a quick win after the Ripple loss. The feeling after Ripple was that the SEC could actually lose cases in court, which is a massive perspective shift from their current win ratio,” he said.
Even so, there are important differences between the development in the Binance lawsuit and the outcome that the SEC aimed for, and failed to win, the Ripple matter, Mr. Evans acknowledged.
“This is not like Ripple, where a judge actually made a decision on the facts. In this issue, CZ personally decided to plead guilty to the charges, and negotiated a ‘lesser’ punishment for his crimes,” Mr. Evans said.
Good Faith Actors
Mr. Evans argued for placing the charges against Binance in perspective. This partly involves understanding that, for firms making their way in the evolving cryptocurrency space, clear and consistent guidance from regulators has not always been available.Moreover, the latter have often been vulnerable to charges of double standards—cracking down hard on some former CEOs while giving others a slap on the wrist—as well as severe legal and ethical overreach.
“Binance has attempted to turn around both their image and their business process in the last few years. Essentially, to become more compliant. When they operated in an ‘unlicensed’ capacity, we have to remember that the whole industry was ‘unlicensed,” Mr. Evans said.
“This doesn’t mean that everyone operating in it was doing so nefariously. The reality is that companies would have happily obtained licenses, if such licenses existed at that time. The U.S. regulators are operating on the belief that companies back around 2017 had no intention of working within the law. Although, yes, there were some bad actors back then, not everyone was looking to break the law,” he added.
The Epoch Times has reached out to the SEC for comment.
