Crypto Clash: Binance and Coinbase charged – key takeaways from the latest developments

On consecutive days in early June 2023, the Securities and Exchange Commission (SEC) announced two significant charges against, arguably, the two biggest crypto businesses in the world: Binance and Coinbase. A day later, the UK’s Financial Conduct Authority (FCA) announced a major clampdown on marketing and promotion of cryptoassets.  In the light of the SEC charges, both Binance and Coinbase saw more than $1bn in negative net outflow.

Where does crypto stand now and what are the implications for compliance teams?

Crypto has a fundamental inherent contradiction at its heart: initiated as a completely decentralised peer-to-peer payment mechanism, it cannot truly scale globally — or even be properly accepted by a true mass market — without traditional financial services institutions joining in. This will inevitably involve regulation.

Over the years, many regulators and authorities have stepped in to try to tame the crypto beast and so the latest developments perhaps should not come as any great surprise. And following the spectacular collapse of Binance’s main competitor FTX, in November 2022, the calls for regulatory action and enforcement were always going to increase. More recently, the SEC’s actions earlier in the year against Bitrex and Beaxy were simply the appetizer to the main feast.

The charges against Binance and Coinbase make it clear that the SEC is not simply paying lip-service to regulatory concerns and both charges have highlighted the poor compliance controls. 

According to the Binance complaint, Binance’s Chief Compliance Officer was quoted as saying:

“We do not want [Binance].com to be regulated ever.”

“We are operating as a fking unlicensed securities exchange in the USA bro.”

And that Binance would engage in: “the international circumvention of KYC.”

Earlier in the year, the Commodity Futures Trading Commission (CFTC) charged Binance with numerous violations of the Commodity Exchange Act (CEA) and CFTC regulations. That complaint also charges Binance’s former Chief Compliance Officer with aiding and abetting Binance’s violations.  According to the CFTC complaint, ex-CCO Samuel Lim “continued his crafty efforts to assist Binance customers in circumventing Binance’s compliance controls” and hence “Lim willfully aided, abetted, counseled, commanded, induced, or procured the acts constituting Binance’s violations described in this Count”.

As far as Coinbase is concerned, the SEC charge notes: “Coinbase has elevated its interest in increasing its profits over investors’ interests, and over compliance with the law and the regulatory framework that governs the securities markets and [which] was created to protect investors and the US capital markets”.

It is little wonder, given the alleged performance of the compliance function within Binance in particular, that regulators are cracking down on crypto in an attempt to try to bring it under traditional financial regulatory control: to that end the FCA’s clampdown on crypto marketing feels like another step to align crypto regulation with traditional assets, as proposed by the UK Treasury in its February consultation.   

The headline-grabbing charges doubtless distract from the genuinely innovative potential that blockchain technology can offer financial services, and those working astride blockchain, and financial services can only hope that the current uncertainty in the regulatory climate can be addressed so that the potential benefits of the technology can be successfully achieved. Compliance teams can positively contribute to that process, but it will not come as any great surprise to those teams working in, or dabbling with, crypto that the key takeaways from the latest actions are ones that will be incredibly familiar:

Review business models and operations Review your business models and operations to ensure that they are compliant with all applicable laws and regulations. This includes reviewing your company’s offerings, products, marketing materials, and customer onboarding procedures.

1. Build a robust compliance program

Develop, implement, and maintain a comprehensive compliance program that includes policies and procedures for managing all aspects of the business, including customer accounts, trading, and custody. The compliance program should be tailored to your specific needs and should be regularly reviewed and updated to ensure that it remains effective.

Using an AI-driven compliance solution such as CUBE’s purpose-built regulatory engine (RegAI) to track, analyze and monitor laws, rules and regulations can free up valuable time spent manually reviewing regulations. CUBE uses AI and machine learning to create an always up to date regulatory platform, enhancing compliance capability for your crypto business.

• Enhance employees’ compliance awareness through proper education and training

Educate and train all employees on compliance policies and procedures. Employees should be aware of their responsibilities under the law and should be able to identify and report potential compliance violations.

• Stay up-to-date on the latest regulatory developments

The crypto industry is constantly evolving, and new regulations are being introduced all the time. Compliance teams must stay on top of these changes to ensure they remain compliant. CUBE’s horizon scanning abilities anticipates and identifies key upcoming regulatory developments, ensuring that your firm is alerted of any compliance gaps.

• Build relationships with regulators

Compliance teams should develop relationships with regulators to better understand their expectations and build trust. This can help prevent regulatory surprises and make it easier to resolve compliance issues.

•  Be proactive

Compliance teams should not wait for regulators to come to them with problems. They should be proactive in identifying and addressing potential compliance issues. This can help to avoid costly fines and penalties. Arrogance or ignorance is not an excuse. Regulatory change management software can help firms to always be on track to be fully compliant. CUBE’s RegAI allows firms to be proactive by ensuring that any relevant compliance trends are flagged, ensuring you are ahead of the curve.

As the industry continues to evolve, collaboration between regulators, compliance professionals, and industry participants becomes paramount. By working together, they can establish a regulatory framework that supports innovation while ensuring investor protection and the integrity of the cryptocurrency market.

Find out how CUBE can help your firm with the latest crypto developments.