Most people would assume since cryptocurrency began with Bitcoin in 2009 it would be considered a form of crypto, yet the SEC declared Bitcoin is not crypto because it is not a security. According to The U.S. Securities and Exchange Commission, Bitcoin’s founder “neither pre-mined any coins nor has any ongoing involvement in the project” and explained that Bitcoin tokens were “intended as a replacement for sovereign currencies”. Every other crypto asset is considered a security because “there’s a group in the middle and the public is anticipating profits based on that group”.

Cryptocurrency fraud has been on the rise since the beginning of the pandemic. In April of this year the Justice Department seized over $112 million in funds linked to cryptocurrency schemes which is a drop in the bucket considering reports of investment fraud from the public to the FBI’s Internet Crimes Complaint Center totaled $3.31 billion last year alone. The largest case of fraud involved FTX and its CEO and founder Samuel Bankman-Fried who was charged with defrauding equity investors of $1.8 billion after the company collapsed along with 101 debtors who were included in the Chapter 11 bankruptcy filing. 

Current lawsuits filed by the SEC against Binance and Coinbase came after it became clear to regulators that the exchanges weren’t following the rules and were potentially violating securities laws. In the court filing, the SEC stated that actions by Coinbase “clearly show they understood that the securities laws could apply to its conduct and knew which rules to consider in evaluating the legality of its conduct, but nevertheless made the calculated decision to take on this risk in the name of growing its business.” Prior to being sued, Coinbase was ordered to halt trading of all crypto assets except Bitcoin.

Binance entities and its founder were charged with “operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversite on the Binance.US platform; and the unregistered offer and sale of securities”. While Binance is allowed to continue U.S. operations during litigation, because founder and CEO Changpeng Zhao is facing additional charges of diverting customer funds, the SEC asked that assets of Binance’s U.S. platform be frozen. Washington D.C. Federal Judge Amy Berman Jackson signed an order that “prevents the defendants from spending corporate assets other than for ordinary business expenses. It also requires SEC oversight on any spending and prohibits the defendants from destroying records”. 

The job of The U.S. Securities and Exchange Commission is to protect consumers from corrupt players and by filing these lawsuits regulators hope fewer consumers will be left “out of pocket”.