The U.S. Securities and Exchange Commission (SEC) has set its sights on major cryptocurrency exchanges, filing separate lawsuits against Coinbase and Binance this week. While both companies face legal action from the SEC, the nature of the regulator’s complaints differ substantially. So what is that difference, and which consequences can one potentially expect in each case?

Overview of the SEC’s Lawsuit Against Binance

The lawsuit against Binance (136-page PDF) alleges numerous violations, including:

  • Mishandling customer funds
  • Misleading investors and regulators
  • Violating securities rules
  • Operating as an unregistered securities exchange, broker-dealer, and clearing agency — all in one
  • Selling unregistered securities, such as $BNB and $BUSD, without complying with regulatory requirements

Overall the charges span 13 federal counts and accuse @binance and its affiliate BAM Trading of engaging in deceptive practices and redirecting funds to a separate investment fund owned by Binance's CEO, @cz_binance (CZ).

It is important to note that the lawsuit against Binance also includes allegations of internal fraud with a large amount of chat logs ("We are operating as a fking unlicensed securities exchange in the USA bro"). Here's a great long thread about that:

Insight into the SEC’s Lawsuit Against Coinbase

The essence of the lawsuit against @coinbase (101-page PDF), in its turn, comes to:

  • Operating as an unregistered securities exchange, broker-dealer, and clearing agency — all in one
  • Selling unregistered securities, particularly via its staking service

So basically, SEC doesn’t claim Coinbase is guilty of commingling of funds — rather, functions. Meaning on traditional markets, unlike crypto, the roles of securities exchange, broker, and clearing house are strictly separated.

The Key Differences Are

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

The lawsuit against Binance, meanwhile, contains a number of more complex allegations that could lead to more severe consequences if proven. The bulk of the lawsuit against Binance targets alleged internal fraud, market manipulation, commingling of investor funds, and diversion of investment funds. So these are really different cases.

Furthermore, SEC alleges that Binance’s wrongdoings occurred under the full CZ’s control. As the main defendant, the SEC mentions the company’s CEO nearly 200 times in the 136-page complaint. In contrast, Coinbase's CEO Brian Armstrong was mentioned in the corresponding lawsuit only once.

One of the most concerning allegations raised is that a significant amount of customer funds, totaling billions of dollars, were directed to a bank account controlled by Zhao himself or an entity under his control.

According to Federica Pantana, an attorney in Davidoff Hutcher & Citron’s Corporate Law practice specializing in securities law compliance, Binance may be in bigger trouble because “a company may never recover from fraud or similar claims."

The lawsuit against Coinbase, in its turn, primarily focuses on the classification of a specific product and whether it qualifies as a security.

The allegations do not concern any fraudulent activities but rather highlight Coinbase's combining of roles strictly segregated in traditional securities markets – such as brokers, exchanges, and clearing houses – without proper registration, thus potentially violating securities law.

And @brian_armstrong, CEO of @coinbase, made it clear, too, that he's aware of this difference between the lawsuits, tweeting:

"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."

Potential Consequences

Coinbase is not the only one who reportedly plans to fight SEC's lawsuit, seeing "a big hole" in the SEC's crypto securities claims and calling on Congress to "Fix the Situation." Binance is also looking to take advantage of the possible opportunities:

But there's no need to say Binance is faced with much more tough allegations from which it may never recover (again, according to an attorney).

So, while Coinbase shares might seem "uninvestable" for some with that kind of lawsuit ongoing, Cathie Wood's ARK Invest fund, for example, bought $22M worth of Coinbase shares after its price tanked. Why? Reportedly, her thesis is that SEC scrutiny into Binance might reduce competition for Coinbase long-term.

Although it should be noted that the ban on operating in the U.S. is contained in the SEC's lawsuits against both exchanges.

And no need to say it would be a very, very long story(-ies). (Can anyone remember how long the trial against Ripple has been going on?)

So don't be in a rush to give up on crypto. There's a lot more to look forward to.