What's going on with Binance, Coinbase?

Cryptocurrency took a major hit this month, as the Securities and Exchange Commission opened lawsuits against popular exchanges Binance and Coinbase.

The SEC alleges Binance diverted customer funds, misled customers about its market surveillance controls and inflated its trading volumes. It also claims Binance offered unregistered securities such as its stable coins and tokens.

With both exchanges, the SEC said that they failed to register as a broker and exchange.

Binance and Coinbase have argued in response to the SEC that cryptocurrencies are not securities, while the SEC has maintained cryptocurrencies should follow registration rules.

In response to the lawsuit, Binance announced it would shut down U.S. dollar deposits and also plans to remove withdrawals, as the SEC has called on regulators to freeze its assets. Coinbase, in turn, has been invited by Hong Kong legislator Johnny Ng to set up shop in Hong Kong, according to a report by Blockworks.

"I hereby offer an invitation to welcome all global virtual asset trading operators including Coinbase to come to [Hong Kong] for application of official trading platforms and further development plans," Ng tweeted. "Please feel free to approach me and I am happy to provide any assistance."

With all of this chaos in the market, exchange Crypto.com, which has run multiple advertisements with actor Matt Damon, announced it will shut down its institutional exchange services in the U.S., due to the current market landscape.

Bitcoin's value did drop from a high of nearly $26,500 to $25,500 following this news, but otherwise has been relatively unaffected. However, these events have raised important questions about how cryptocurrency exchanges can continue to do business in the U.S. and how existing exchanges can get in line with regulations.

To learn more about these questions, ATM Marketplace reached out to Itai Avneri, deputy CEO at INX, for his insight via an email interview.

Q. What is the central disagreement between the SEC and Binance and Coinbase?

A. The most important disagreement is that Binance and Coinbase claim there is no regulatory framework for listing and trading securities, while the SEC is saying that the two organizations are knowingly operating an unregistered securities exchange in the U.S. and trading assets that are deemed as securities, but are not registered as such. The lawsuits also claim that there was alleged fraud, price manipulation and other claims against both exchanges.

Bottom line, the SEC sees cryptos as securities. Binance and Coinbase has hundreds of cryptocurrencies trading on their exchanges and they will have to delist all of them (not just the coins mentioned in the lawsuit).

Q. How will Coinbase and Binance recover?

A. You cannot fix something that was born broken. The only path forward for them is to partner with a registered securities exchange. A national/traditional exchange or a digital one, then find a way to convert those cryptocurrencies into registered securities and list them on a licensed, regulated securities exchange.

Q. How does this impact consumer trust in crypto in general?

A. I do think customers are very skeptical of the market already, especially after the Voyager, Celsius and FTX fallouts in the past year or so. Today, customers are choosing more carefully the assets they trade and where they trade them. They also need to walk away from assets deemed as a security, or trade them only on a registered exchange. We will see more withdrawals and less volume in the coming days and weeks, and we'll see less new accounts and new traders entering the market.

In the long-term, the market will see more and more consumers/investors opting in to the digital asset space only on SEC-registered platforms and exchanges.

Q. What does a regulated digital asset look like?

A. According to the SEC, most digital assets that are securities look like any other security in the U.S., with a prospectus that has been filed (PPM), they will register the token with the SEC and list it on an exchange with a broker-dealer and Digital ATS license. Additionally, they will most likely be able to self-custody those tokens.