Glitch Protocol

Bessie Liu

Composable Finance is bringing inter-blockchain communication (IBC) from the Cosmos to Polkadot.



IBC, as its name indicates, is an interoperability protocol that helps blockchains communicate with each other in the Cosmos ecosystem.&nbsp;



The protocol is designed with a transportation layer and an application layer; these layers work together so information between different blockchains can be accurately and securely transferred.&nbsp;



Although it is native to the Cosmos ecosystem, IBC can connect to app chains outside of its network. Composable Finance sees this as an opportunity to bring this technology to Polkadot and other ecosystems.



For this reason, the company has chosen to use IBC to connect DeFi functions across different ecosystems, Jafar Azam, head of developer relations at Composable Finance, told Blockworks.&nbsp;



“We believe in a future where users go to an application, and they don&#8217;t care what chains the application sits on, as long as they&#8217;re getting the best and most efficient rate that they want,” Azam said.



While Polkadot does have a counterpart to the IBC called the Cross-Consensus Message Format (XCM), Azam points out that its functionality is restricted to bridging between parachains.



“We looked at how IBC was working, and it had been in communication transfers over the past few years since launch, and due to its trustless nature, we chose it as the transfer layer to bridge to other ecosystems,” he said.



According to Azam, the IBC has already facilitated the connection between Polkadot and Kusama, which serves as Polkadot&#8217;s canary network — a testing ground of sorts for features and functions. There are also plans to establish a connection between Polkadot and Cosmos later this month.



Choosings IBC over other bridging solutions ultimately came down to its decentralized, trustless nature, Azam explains. Noting that a lot of bridge communication protocols rely on multi-sigs, where funds can be withdrawn if multisig holders choose to collude.&nbsp;



“You’re looking at an entire ecosystem being demolished just via four people&#8230;because IBC does not rely on any third party, it’s not a centralized solution,” Azam said. “That’s why we chose IBC.”



Composable Finance is also one of the first teams to implement CosmWasm, a protocol facilitating the creation of modular smart contract code. Composable Finance implemented it outside of the Cosmos ecosystem, enabling existing projects on Cosmos to deploy on Polkadot.



“Polkadot and Cosmos share a similar vision where you have a range of heterogeneous blockchains working together, our goal is bridging between these two ecosystems because everybody has the same vision of a cross-chain future,” he said.



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DeFi Users ‘Don’t Care’ What Chain Apps Are On: Composable Finance

Katherine Ross

Coinbase CEO Brian Armstrong responded to the <a href="https://blockworks.co/news/sec-sues-coinbase">SEC’s lawsuit against the exchange </a>on Tuesday, June 6.&nbsp;



Armstrong said that the <a href="https://blockworks.co/tag/SEC">SEC</a> reviewed Coinbase’s business in 2021 and “allowed us to become a public company,” despite the 2019 claims in the SEC’s lawsuit. 



“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,” Armstrong tweeted.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Regarding the SEC complaint against us today, we&#39;re proud to represent the industry in court to finally get some clarity around crypto rules. Remember: 1. The SEC reviewed our business and allowed us to become a public company in 2021. 2. There is no path to &quot;come in and…&mdash; Brian Armstrong 🛡️ (@brian_armstrong) <a href="https://twitter.com/brian_armstrong/status/1666129111025324035?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The SEC claimed that <a href="https://blockworks.co/tag/coinbase">Coinbase</a> violated the Exchange Act and Securities Act, specifically targeting four violations. 



With the violations, it specified that “since at least 2019, through the Coinbase Platform, Coinbase has operated as: an unregistered broker, including by soliciting potential investors, handling customer funds and assets, and charging transaction-based fees; an unregistered exchange, including by providing a marketplace that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders; and an unregistered clearing agency, including by holding its customers’ assets in Coinbase-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant accounts.”



The <a href="https://blockworks.co/news/sec-sues-coinbase-allegations">securities targeted by the regulator</a> include SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO.



Read more: <a href="https://blockworks.co/news/sec-sues-coinbase-allegations">SEC Sues Coinbase: Here’s What They Allege Coinbase Did Wrong</a>



“There is no path to ‘come in and register’ &#8211; we tried, repeatedly &#8211; so we don&#8217;t list securities. We reject the vast majority of assets we review,” he said.



Armstrong continued, “this is why the US congress is introducing new legislation to fix the situation, and the rest of the world is moving to put clear rules in place to support this technology.”



According to a video, also tweeted by Armstrong, Coinbase met with the SEC 30 times in 2022 to ask for guidance.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Regarding the SEC complaint against us today, we&#39;re proud to represent the industry in court to finally get some clarity around crypto rules. Remember: 1. The SEC reviewed our business and allowed us to become a public company in 2021. 2. There is no path to &quot;come in and…&mdash; Brian Armstrong 🛡️ (@brian_armstrong) <a href="https://twitter.com/brian_armstrong/status/1666129111025324035?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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The SEC’s lawsuit against Coinbase comes just a day after the <a href="https://blockworks.co/news/sec-allegations-against-binance">SEC filed a lawsuit against Binance</a>. It also targeted the Binance.US Staking Program and claimed that Binance listed securities.



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Coinbase CEO Calls on Congress to ‘Fix the Situation’ After SEC Lawsuit

Ben Strack

The SEC’s lawsuit against Coinbase has some wondering why the securities regulator allowed the company to go public in the first place.&nbsp;



But the SEC doesn’t truly “approve” a direct listing, but rather whether the company has fulfilled certain requirements to do so, industry watchers said.



Coinbase first revealed in April 2021 that the SEC “declared effective” its registration on Form S-1 — the initial registration form for new securities — related to a proposed public direct listing of its Class A common stock.



<a href="https://blockworks.co/news/sec-sues-coinbase">The SEC sued Coinbase Tuesday</a> for allegedly operating as an unregistered exchange since at least 2019. Coinbase Chief Legal Officer Paul Grewal said the SEC’s enforcement-only approach amid unclear crypto regulations hurts companies like Coinbase “that have a demonstrated commitment to compliance.”&nbsp;



“For the SEC to now come back around and claim that a bunch of things that were already presented are problematic is nonsense,” crypto podcaster Scott Melker said during a Twitter Space Monday.&nbsp;



Melker’s comments came after <a href="https://blockworks.co/news/sec-allegations-against-binance">the SEC brought a suit against Binance</a> — in anticipation that the regulator would next go after Coinbase after serving the latter company with <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">a Wells notice</a> in March.&nbsp;



Other industry folk took to Twitter, claiming the latest suit is contradictory to the regulator allowing Coinbase’s public listing.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The SEC just went after <a href="https://twitter.com/coinbase?ref_src=twsrc%5Etfw">@coinbase</a> The SEC also approved the Coinbase IPO in 2021 This is contradictory This is predatory This is communism <a href="https://t.co/k3KpnIHCH0">https://t.co/k3KpnIHCH0</a>&mdash; Wendy O (@CryptoWendyO) <a href="https://twitter.com/CryptoWendyO/status/1666067395054817280?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



But Joe Carlasare, partner at law firm Amundsen Davis LLC, countered Melker’s point on the <a href="https://twitter.com/i/spaces/1MYxNgkEkYOKw?s=20">Twitter Space</a>, noting that the approval of a registration statement is handled by an “entirely different division” within the regulator.



“You basically have people that look at the paperwork and say are you disclosing everything? Are you making sure that you’re not hiding anything for investors?” he said. “[The SEC decided] to greenlight that even though the underlying activity itself is unlawful in their mind.



“That’s how absurd their reasoning is at the SEC, with all due respect to the people at the SEC,” Carlasare added.&nbsp;



The SEC did not immediately return a request for comment.&nbsp;



Bruce Fenton, managing director at blockchain startup Chainstone Labs, agreed, saying that the SEC approving a public offering is “not passing merit on the business” of that entity.



“There’s no offering that they approve,” Fenton explained. “What they will approve is a registration statement and they basically say this is complete, you’ve disclosed all of the things you need to disclose, you’ve got the auditing that you need and you’ve got the stuff you need to do to be a publicly traded company.”



A year prior to the public listing, Coinbase appointed Deloitte as its independent registered public accounting firm.



Though odd to see the SEC act against a company it essentially allowed to become a public company, Morningstar Analyst Michael Miller said, he told Blockworks that greenlighting that process is “not an endorsement.” Nor is it “a long-term claim on any future changes in strategy the company makes being also OK,” he added.



Gary Gensler became the SEC’s chair in the same month Coinbase went public, and so legwork around the SEC declaring effective the crypto exchange’s registration statement predates him, Miller noted.



Coinbase also expanded the number of cryptocurrencies it was listing on its exchange after it went public, he added.&nbsp;&nbsp;



The company stated a goal to “bring more assets to Coinbase, faster” in a June 2021 <a href="https://www.coinbase.com/blog/embracing-decentralization-at-coinbase">blog </a>post, adding that it would seek to “list all legal assets.”



“Also…we’ve seen some of the issues that can arise when you have an exchange, brokerage and custody service kind of combine into one and the conflict of interest — very loudly with FTX,” Miller said. “So there’s realistically more regulatory attention being paid to that business model.”



Coinbase has repeatedly contended since receiving a Wells notice from the SEC in March that the company does not list securities.&nbsp;



The crypto exchange noted in an April <a href="https://assets.ctfassets.net/c5bd0wqjc7v0/2pW56ln6rPJ7koLHlu2L8G/5041e0166c408698b621fde543539d76/2023-04-19_Coinbase_Wells_Submission.pdf">filing</a> its “extensive efforts” to engage with the SEC during its public listing process, as well as before and after.&nbsp;&nbsp;



“This abrupt move toward litigation did not result from discovering new facts about Coinbase’s business; the commission has the same facts today that it has had for years,” it states. “Nor does it result from the staff’s discovery of something that Coinbase concealed or misrepresented in its extensive engagement with the staff, including during the registration process. Coinbase did no such thing.”



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Coinbase Was Allowed to Go Public, Then Got Sued — Hypocrisy? Not Really, Some Say

A Paypal survey on the metaverse showed that 56% of respondents said that their use of crypto will increase over the next five years.&nbsp;



The study defined the metaverse as “a virtual space where users can act through an avatar and interact with each other and with a computer-generated environment.” It also cites both Meta and Roblox as metaverse companies.



Though the study digs into the role crypto plays, the metaverse definition used by Paypal is not directly related to blockchain technology.



The survey was commissioned by Paypal late 2022 and included 10,000 adults active in the <a href="https://blockworks.co/tag/metaverse">metaverse</a>.



<h2>Crypto and the metaverse</h2>



Eighty percent of metaverse users currently use crypto, while 97% of metaverse users hold coins — Bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) takes the cake as the most-held coin, while ether (<a href="https://blockworks.co/price/eth">ETH</a>) and robux (<a href="https://blockworks.co/price/rbx">RBX</a>) come in second and third.&nbsp;



While the metaverse isn’t making easy money for people yet, this is an area that 75% of users are interested in, with the majority wanting to get paid in crypto over fiat despite the market downturn.



However, the metaverse has a few hurdles to overcome with it comes to both interoperability and safety of funds.



“For money in the metaverse to effectively perform the three core functions of money unit of account, medium of exchange, and store of value), the metaverse financial infrastructure needs to provide three kinds of money interoperability – interoperability across metaverse platforms; interoperability between metaverse platforms and other online environments; interoperability between virtual and physical worlds,” the survey <a href="https://newsroom.paypal-corp.com/2023-06-Metaverse-and-Money">said</a>.



The majority of those surveyed also seek the ability to either insure payments against fraud or store digital assets securely.&nbsp;



“In the case of the metaverse, digital wallets could extend to enabling avatar verification and interoperability too,” the survey said.



<h2>The state of the metaverse</h2>



Paypal said that it expects spending in the metaverse to be in the billions. The survey found that the majority of the users currently engage with video games in the metaverse.&nbsp;



Currently, people are spending $28 billion a year in the metaverse with slightly less than 38 million people.&nbsp;



“Taking current users and future users in the U.S. together, the estimated total spending in the metaverse would be $72.6 billion in the next year and $92.7 billion per year on average in the next 5 years,” the survey said.



In the past year, there’s been mass speculation on the state of the metaverse — is it dead? Evolving?&nbsp;



Meta, which renamed itself after its metaverse plans, was used as a prime example of the metaverse gone wrong, with the stock dipping below $100 throughout 2022 and Meta announcing thousands of job cuts.&nbsp;



Meta’s <a href="https://blockworks.co/news/meta-metaverse-unit-has-lost-5-7b-this-year">metaverse unit lost a whopping $5.7 billion</a> so far this year.



Even <a href="https://blockworks.co/news/microsoft-culls-metaverse-team">Microsoft let go of its metaverse team</a> months after creating it.&nbsp;



However, companies such as Fidelity and Gucci have entered the metaverse. Gucci <a href="https://blockworks.co/news/gucci-yuga-labs-bayc-metaverse">teamed up with the Bored Ape Yacht Club</a> back in March to see how fashion can interact with the metaverse.&nbsp;



Fidelity has <a href="https://blockworks.co/news/fidelity-doubles-down-metaverse">doubled down on its metaverse presence</a>, launching Pancake Empire Tower Tycoon on Roblox and Bloom-o-rama in Decentraland. It’s also not the only — for first — traditional finance company to take steps in the metaverse, with both <a href="https://blockworks.co/news/hsbc-buys-virtual-real-estate-in-sandbox-metaverse">HSBC</a> and <a href="https://blockworks.co/news/jpmorgan-enters-the-metaverse-with-virtual-decentraland-lounge">JPMorgan</a> both making their own metaverse moves.&nbsp;



Apple announced a virtual reality headset on Monday, though the announcement – which happened during the Worldwide Developers Conference – made no direct mention of the metaverse or any of Apple’s plans to enter the category.



The survey’s conclusions compare the metaverse to camera technology. Basically, we may be able to access pictures of places across the globe, but that doesn’t stop people from visiting monuments — and has even evolved to allow us to have a camera with us at all times.&nbsp;



“We imagine, though, that the metaverse will be more like the camera; not a wholesale replacement of our physical lives, but a supplement to them,” Paypal said.



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80% of Metaverse Users Use Crypto, Paypal Survey Finds

Casey Wagner

On the heels of the SEC suing both Binance and Coinbase, the House Agriculture Committee gathered Tuesday morning for a dual panel hearing to discuss crypto spot market regulation.



Lawmakers first posed questions to Commodity Futures Trading Commission Chair <a href="https://blockworks.co/tag/rostin-benham">Rostin Behnam</a>, before turning to a five-witness panel consisting of industry industry, as well as former <a href="https://blockworks.co/tag/cftc">CFTC</a> executives.&nbsp;



Behnam in his remarks focused on crypto token classification, the current pattern of regulation by enforcement and the need for regulatory clarity. The <a href="https://blockworks.co/tag/sec">SEC</a> made a point of deeming more than <a href="https://blockworks.co/news/sec-10-tokens-securities">10 tokens securities</a> between its Binance and Coinbase suits this week.&nbsp;



“There are some who argue ‘the SEC’s got this,’” Dusty Johnson, R-S.D., said during his allotted time to question Behnam.&nbsp;



But should the SEC have total control over digital assets, Johnson asked?



Read more: <a href="https://blockworks.co/news/gensler-dollar-is-digital-currency">Gensler Says US Dollar Is Only Digital Currency We Need</a>



“This is not a zero-sum game,” Behnam said. “For anything that the CFTC might get in legislative or legal authority, I’m not taking it from someone else. There is a regulatory vacuum, there is a gap in regulation over digital commodity assets.”&nbsp;



<h2>SEC securities authority</h2>



The SEC should have authority over assets classified as securities, according to Behnam, who added that “the fact of the matter is the largest token, bitcoin, is a commodity, and that was determined by a US court, and that, under US law, is unregulated.”&nbsp;



Most exchanges list very few crypto assets that have already been officially classified as commodities, Behnam said. The CFTC chair made the point that, as such, there’s a pressing need to give the regulatory additional authority over the crypto commodity sector.&nbsp;



Several lawmakers aired concerns about the perceived pattern of regulation by enforcement in the US.&nbsp;



“Regulation by enforcement is not an appropriate way to govern a market, adequately protect customers or promote innovation,” Committee Chair Glenn Thompson, R-Penn., said during his prepared remarks.



Rep. Jim Govern, D-Mass., asked Behnam what could happen if this pattern continues.&nbsp;



“The evidence is in our enforcement record, and we even point to the SEC’s enforcement record as well,” Behnam said. “We brought 82 cases over about 8 years, and [these] 82 cases [came from] an agency that doesn’t have regulatory authority.”&nbsp;



The issue is not that the CFTC and SEC should avoid charging entities in violation of existing law, according to the CFTC chair. But it’s rather, in Behnam’s estimation, about a need for more congressional authority to address crypto risks and establish clear policies.



“My fear is that this… is the tip of the iceberg,” Behnam said. “As this market ebbs and flows in size, and it has largely stabilized in the last six months, if it starts to peak and move into a direction of growing, you could potentially have financial stability concerns.”&nbsp;



Tuesday’s hearing started just hours after the SEC<a href="https://blockworks.co/news/sec-sues-coinbase"> unveiled charges against crypto exchange Coinbase</a> for alleged securities laws violations. The complaint was filed one day after the SEC levied <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">similar charges against Binance</a>, the world’s largest exchange.&nbsp;



Coinbase Chief Legal Officer Paul Grewal is set to join Dan Gallagher, Robinhood’s chief legal compliance and corporate affairs officer, on the second panel of Tuesday’s hearing.&nbsp;



Second panel witnesses also include former CFTC Chair Christopher Giancarlo, former CFTC Commissioner and former SEC General Counsel Dan Berkovitz, and Walt Lukken, former CFTC acting chair.



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Regulation by Enforcement Is Unsustainable, CFTC Chair Tells Congress

James Cirrone

SEC Chair Gary Gensler appeared on CNBC&#8217;s Squawk Box to discuss the recent lawsuits filed by the SEC against Binance and Coinbase. The lawsuits accuse both platforms of operating as unregistered securities exchanges.



Gensler’s main thrust was that Coinbase, Binance and other crypto exchanges are evading American regulation and that “there’s been clarity for years.”



“It&#8217;s fundamentally a lack of controls, deception, [and] conflicts,” Gensler said. “The whole business model is built on non compliance with the US securities laws and we&#8217;re asking them to come into compliance so they&#8217;re going a bit of ‘catch us if you can.’”



Gensler repeatedly touted the SEC’s claim that Binance CEO Changpeng Zhao <a href="https://blockworks.co/news/sec-allegations-against-binance">commingled customer funds with those of his trading firm Merit Peak Limited</a> as an example of why crypto exchanges need more oversight. Binance denied this allegation.



<a href="https://blockworks.co/tag/binance">Binance</a> was a continued target in the interview on CNBC, with fewer mentions of Coinbase. To that end, Gensler suggested that users should think twice about leaving their funds on Binance’s platform.



“Make no mistake, it is not proper custody to have funds and crypto securities on platforms like Binance,” he said.



Gensler also talked about the worth of certain crypto tokens, saying there’s a lot of debate about use cases.&nbsp;



When host Jim Cramer raised several questions about the value of the <a href="https://blockworks.co/news/sec-10-tokens-securities">coins listed as securities in the Binance complaint</a>, such as SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI, Gensler was much clearer.



“Look, we don&#8217;t need more digital currency. We already have digital currency. It&#8217;s called the US dollar. It&#8217;s called the euro. It&#8217;s called the yen. They&#8217;re all digital right now. We already have digital investments,” Gensler said.&nbsp;



He continued, “We have not seen over the centuries that economies or the public needs more than one way to move value.”



Despite his skepticism of a future where crypto exists alongside fiat currencies, Gensler added that, “if there&#8217;s a real value in these crypto tokens, then compliance will build trust and the business model might change” for crypto exchanges.



He further asserted that the <a href="https://blockworks.co/tag/sec">SEC</a>’s recent actions are “pro innovation,” striking back at Binance’s <a href="https://www.binance.com/en/blog/ecosystem/sec-complaint-aims-to-unilaterally-define-crypto-market-structure-8707489117122437402">claim</a> that his agency is undermining “America’s role as a global hub for financial innovation and leadership.”



“What we&#8217;re doing at the SEC is pro innovation because, without trust, the capital markets really don&#8217;t work,” Gensler said.&nbsp;



Gensler declined to talk about specific communications between the SEC and the companies in question, but said he remains ready to bring additional crypto exchanges into proper compliance.



In terms of the SEC’s goal in court, Gensler said that all it has to do is prove that one crypto token “is a security” and “should be properly registering.”



Gensler has been in the spotlight for months, as his agency ramps up enforcement against crypto companies. When he <a href="https://blockworks.co/news/gensler-house-financial-services-committee">testified before Congress back in April</a>, Gensler refused to answer whether <a href="https://blockworks.co/news/regulatory-clarity-ethereum-gensler">ether was a security or a commodity</a>.



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Gensler Says US Dollar Is Only Digital Currency We Need

In addition to the SEC’s lawsuit against Coinbase — which was filed Tuesday morning — 10 states announced a show cause order against Coinbase.&nbsp;



“The order gives Coinbase 28 days to show cause why they should not be ordered to cease and desist from selling unregistered securities in Alabama,” the Alabama Securities Commission <a href="https://asc.alabama.gov/News/2023%20News/6-6-2023_Coinbase.pdf">wrote</a>.&nbsp;



Securities regulators from California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin are also part of the state task force.&nbsp;&nbsp;



The show cause order from Alabama alleges that Coinbase “violates the securities law by offering its staking rewards program accounts to Alabama residents without a registration to offer or sell these securities.”



It goes on to claim that the “3.5 million staking rewards program accounts nationwide are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC),” which means that investors are not protected from losses.&nbsp;



Coinbase’s staking program offers five crypto assets including <a href="https://blockworks.co/price/XTZ">XTZ</a>, <a href="https://blockworks.co/price/ATOM">ATOM</a>, <a href="https://blockworks.co/price/ETH">ETH</a>, <a href="https://blockworks.co/price/ADA">ADA</a> and <a href="https://blockworks.co/price/SOL">SOL</a>.&nbsp;



The SEC pinpointed <a href="https://blockworks.co/news/sec-sues-coinbase">Coinbase’s staking program in its lawsuit,</a> claiming that, “the Staking Program includes five stakeable crypto assets, and the Staking Program as it applies to each of these five assets is an investment contract, and therefore a security.”



Read more: <a href="https://blockworks.co/news/sec-sues-coinbase-allegations">SEC Sues Coinbase: Here’s What They Allege Coinbase Did Wrong</a>



“At all relevant times, the Coinbase Staking Program, as it applied to each of the five stakeable assets, was an investment contract under Howey, and therefore a security, whose offers and sales were subject to registration under the Securities Act,” the suit goes on to say.



The SEC’s lawsuit also alleges that <a href="https://blockworks.co/tag/Coinbase">Coinbase</a> listed and sold unregistered securities.&nbsp;



Coinbase did not immediately respond to a request for comment.



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Coinbase Staking Program Targeted by Alabama Securities Regulator

With Coinbase joining Binance as the second cryptocurrency heavyweight sued by the SEC in roughly 24 hours, the industry is reeling.



And industry participants on Tuesday were amping up their efforts to digest the content — and the implications — of both landmark legal actions.&nbsp;



The SEC this week claimed that both <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">Binance</a> and <a href="https://blockworks.co/news/sec-sues-coinbase">Coinbase</a> have been operating unregistered exchanges and listing a number of individual tokens <a href="https://blockworks.co/news/sec-10-tokens-securities">the regulator has deemed unregistered securities</a>.&nbsp;



“But while paying lip service to its desire to comply with applicable laws, Coinbase has for years made available for trading crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities laws,” the SEC claims.



Binance’s CEO, who took to Twitter on Monday after his company was served with the suit, was quick to play to the court of crypto public opinion in responding to the SEC’s suit against rival Coinbase.&nbsp;



Changpeng “CZ” Zhao tweeted, “If you have to pick a fight with everyone, maybe you are the one at fault.”&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">If you have to pick a fight with everyone, maybe you are the one at fault. 🤷‍♂️&mdash; CZ 🔶 Binance (@cz_binance) <a href="https://twitter.com/cz_binance/status/1666067006213222403?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



In expounding upon the Coinbase suit, SEC Commissioner <a href="https://blockworks.co/tag/gary-gensler">Gary Gensler</a> via Twitter early on Tuesday doubled down on his agency’s legal opinion regarding <a href="https://blockworks.co/tag/binance">Binance</a> from the day prior.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. <a href="https://t.co/FwpdmENvoL">https://t.co/FwpdmENvoL</a>&mdash; Gary Gensler (@GaryGensler) <a href="https://twitter.com/GaryGensler/status/1666059466750541825?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<a href="https://blockworks.co/news/gary-gensler-national-disgrace">Gensler</a> also agreed to interviews on both CNBC and Bloomberg scheduled for Tuesday morning.



<a href="https://blockworks.co/tag/jack-dorsey">Jack Dorsey</a>, in a tweet on Monday, seemingly projected cryptocurrency industry support on the heels of the SEC’s 136-page lawsuit against Binance, the exchange’s US affiliate, and founder Zhao. Dorsey, the chief executive of Block, has been a vocal advocate of cryptocurrencies — especially bitcoin.&nbsp;



Dorsey tweeted, “Steady lads.”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Steady lads&mdash; jack (@jack) <a href="https://twitter.com/jack/status/1665804355478466560?ref_src=twsrc%5Etfw">June 5, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Dan Raju, CEO of fintech company Tradier, told Blockworks that greater and clearer crypto regulation by the SEC is long overdue.&nbsp;&nbsp;



“The latest move by the SEC indicates that over time crypto offerings will be regulated and controlled similar to the traditional stack of participants in the equities market,” he said. “I also believe that while in the short run they may have an impact on crypto prices, it will only create retail confidence on crypto in the long term.”



Prior to the <a href="https://blockworks.co/tag/SEC">SEC</a>’s latest move against <a href="https://blockworks.co/tag/coinbase">Coinbase</a>, Paul Grewal, the exchange’s chief legal officer, laid out his ideal framework for more clear rules and regulations around digital assets. Coinbase has repeatedly asked the SEC for updated digital asset guidance.&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">How we define digital assets is critical for enabling innovation. Digital assets are diverse, and if we fail to effectively draw clear definitions of which assets are securities, which are commodities, and which are neither, crypto will continue to sit in regulatory limbo.&mdash; paulgrewal.eth (@iampaulgrewal) <a href="https://twitter.com/iampaulgrewal/status/1665859403520655360?ref_src=twsrc%5Etfw">June 5, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Grewal is set to appear before the House Committee on Agriculture to discuss the Digital Asset Market Structure Discussion Draft Tuesday morning.



Kristin Smith of The Blockchain Association was unimpressed with the latest salvo from the SEC, noting that the regulator doesn&#8217;t &#8220;make the law &#8211; it only makes accusations.&#8221;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">The following statement is attributed to Blockchain Association CEO <a href="https://twitter.com/KMSmithDC?ref_src=twsrc%5Etfw">@KMSmithDC</a>: “The SEC doesn’t make the law – it only makes accusations – and we’re confident the courts will prove Chair Gensler wrong in due time. “Contrary to what Chair Gensler says, there is no regulatory… <a href="https://t.co/EyApCJoDqI">pic.twitter.com/EyApCJoDqI</a>&mdash; Blockchain Association (@BlockchainAssn) <a href="https://twitter.com/BlockchainAssn/status/1666089878940176388?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



<h2>Did the SEC give “Binance some slack?”</h2>



Traders this week have once again been asking why Coinbase was even allowed to go public in 2021 — considering that the SEC claims that it’s been offering the sale of unregistered securities as well as operating as an unregistered broker since 2019.&nbsp;



“In fact, by suing Coinbase they pretty much just gave Binance some slack to win against their lawsuit as well; since they can just delay until Coinbase finishes and then cite Coinbase&#8217;s case,” @WolfOfPoloniex tweeted.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">So in SEC&#39;s complaint vs Coinbase, it states that they&#39;ve been acting as an unregistered broker since 2019. Yet&#8230;. the on April 14th, 2021 <a href="https://twitter.com/search?q=%24COIN&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$COIN</a> became a public company on the Nasdaq. How on God&#39;s green earth do they possibly believe this lawsuit will ever hold up in court?… <a href="https://t.co/tYyEroRN6F">pic.twitter.com/tYyEroRN6F</a>&mdash; The Wolf (@WolfOfPoloniex) <a href="https://twitter.com/WolfOfPoloniex/status/1666061923778187265?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Crypto analyst Miles Deutscher had similar concerns, tweeting, “So you’re telling me that the SEC let an ‘unregistered broker’ IPO &#8211; after carrying out due diligence?”



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">So, let me get this straight. The SEC says that “Coinbase has operated as an unregistered broker since 2019”. Yet Coinbase IPOd in April 2021. So you’re telling me that the SEC let an &quot;unregistered broker&quot; IPO &#8211; after carrying out due diligence? Well done Gary. 👏&mdash; Miles Deutscher (@milesdeutscher) <a href="https://twitter.com/milesdeutscher/status/1666061714411106306?ref_src=twsrc%5Etfw">June 6, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



After <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">receiving a Wells notice</a> from the SEC in March, Coinbase said it would defend itself against a regulator it says is going beyond its authority. &nbsp;



CEO Brian Armstrong said in a Twitter Space soon after the Wells notice that <a href="https://blockworks.co/news/coinbase-happy-to-go-to-court-with-sec">the courts might be able to offer clarity</a> on this matter.&nbsp;



Coinbase <a href="https://blockworks.co/news/coinbase-q1-stats-stand-out">dropped its net loss to $79 million</a> during the first quarter — down from $557 million in the last three months of 2022 — as it sought to reel in spending. The company said it expected costs to rise in the second quarter, in part due to legal expenses.



Ben Strack contributed reporting. 



Updated June 6, 2023 at 10:21 am ET: Added comment from Dan Raju, CEO of fintech company Tradier. Added comment from Kristin Smith of The Blockchain Association.



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CZ, Jack Dorsey React to Coinbase and Binance Lawsuits

Macauley Peterson

The Ethereum blockchain explorer Etherscan has rolled out a new advanced filtering feature that expands the tool kit available for reading on-chain data.



The new feature, in beta, makes it easier to search for specific information directly on the <a href="https://blockworks.co/tag/data-analytics" target="_blank" rel="noreferrer noopener">data analytics</a> platform, without needing to run specialized queries in analytics dashboards such as <a href="https://blockworks.co/tag/dune-analytics" target="_blank" rel="noreferrer noopener">Dune Analytics</a>, which require knowledge of SQL.



Etherscan serves as a powerful microscope for the blockchain that empowers researchers to uncover valuable insights into transaction histories.



It has been operating since 2015 as a free and open-source project “with the mission of providing equitable access to blockchain data,” according to its <a href="https://etherscan.io/aboutus" target="_blank" rel="noreferrer noopener">About Us</a> page.



The Advanced Filter beta currently supports filtering by various criteria, including transaction type, method, from or to addresses, types and amounts of assets.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Advanced Filter enables you to analyse a variety of transactions within a single view Filter by transaction type, function name, duration, amounts, assets and from &amp; to addresses <a href="https://t.co/6GYbWIxG7q">pic.twitter.com/6GYbWIxG7q</a>&mdash; Etherscan (@etherscan) <a href="https://twitter.com/etherscan/status/1664589461060227072?ref_src=twsrc%5Etfw">June 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



With an Etherscan login, you can save filtered queries for later use.



For instance, you might want to see withdrawals larger than $1 million in USDC from Binance <a href="https://etherscan.io/advanced-filtered?txntype=2&amp;fadd=0x28c6c06298d514db089934071355e5743bf21d60&amp;tadd=&amp;tkn=0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48&amp;amt=1M%7eMAX&amp;age=24H" target="_blank" rel="noreferrer noopener">over the past 24 hours</a>, to gauge customer reaction to <a href="https://blockworks.co/news/binance-execs-unlicensed-securities-exchange">Monday’s SEC lawsuit</a>.



The tool will be a boon for on-chain sleuths like ZachXBT and MyCrypto founder Taylor Monahan in efforts to track down scammers and thieves and their victims more efficiently.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">yeah sex is great an all but have you ever been tracing funds at 4am and suddenly been granted the magical ability to filter up and down a fat list of txns and hop from victim to thief instantly and share a link to it instead of taking yet another unsearchable screenshot 🤤🤤&mdash; Tay 💖 (@tayvano_) <a href="https://twitter.com/tayvano_/status/1664591535374204928?ref_src=twsrc%5Etfw">June 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Among many use-cases, it should come in handy for tasks like piecing together data for tax filing purposes or more fanciful endeavors like checking the latest <a href="https://etherscan.io/advanced-filtered?fadd=0x47a37ea6b691eb76aaf771d5bdbba2ca68add173&amp;tadd=0x47a37ea6b691eb76aaf771d5bdbba2ca68add173&amp;txntype=0&amp;mtd=0x11dabc93%7eCreate_bid&amp;amt=1-10" target="_blank" rel="noreferrer noopener">auction bids</a> for <a href="https://www.thellamas.io/" target="_blank" rel="noreferrer noopener">The Llamas</a> NFT collection.



The feature is still somewhat limited — you can’t dial in specific amount ranges, or sort and export results, for instance —&nbsp;but the Etherscan team expects to update it with improvements based on user feedback.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">This is a Beta release, some limitations include: &#8211; Poor reputation tokens, ignore list tokens, and failed transactions displayed with no option to hide them &#8211; From and To addresses are only joined by OR operator Let us know what you&#39;d like us to add or improve! 🙏&mdash; Etherscan (@etherscan) <a href="https://twitter.com/etherscan/status/1664589479917813761?ref_src=twsrc%5Etfw">June 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



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Etherscan Advanced Filter Feature Helps On-chain Sleuths

Coinbase shares dipped about 16% during pre-market trading Tuesday morning in New York following news that the SEC has charged the exchange for allegedly violating securities laws. 



The crash comes one day after Coinbase shares posted a 9% drop on Monday during the regular trading session, following news that <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges" target="_blank" rel="noreferrer noopener">rival exchange Binance had been sued by the securities regulator</a>.&nbsp;



<a href="https://blockworks.co/price/COIN">COIN</a>, which has dropped more than 80% since its direct listing in April 2021, has managed a substantial rebound since the start of the year, rallying around 75% year to date. <a href="https://blockworks.co/news/sec-sues-coinbase" target="_blank" rel="noreferrer noopener">Tuesday’s news</a> sent shares below the $60 level analysts have been watching. 



Read more: <a href="https://blockworks.co/news/sec-sues-coinbase-allegations">SEC Sues Coinbase: Here’s What They Allege Coinbase Did Wrong</a>



As of Monday, analysts surveyed by MarketBeat gave Coinbase a hold rating.&nbsp;



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/14035413/embed#?secret=feRm2cMJ5b" data-secret="feRm2cMJ5b" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Coinbase stock is now underperforming bitcoin and ether year to date</figcaption></figure>



Bitcoin (<a href="https://blockworks.co/news/price/BTC">BTC</a>) and ether (<a href="https://blockworks.co/price/ETH">ETH</a>) moved slightly into the red on the news, dipping about 0.6% and 0.1%, respectively. The drop was substantially less than Monday’s decline, where <a href="https://blockworks.co/news/markets-red-after-sec-binance">both tokens lost around 2%</a> after the SEC announced its Binance suit. 



The SEC names <a href="https://blockworks.co/tag/coinbase">Coinbase</a> and its holding company CGI as defendants in the suit. The regulator alleges defendants broke securities laws by operating the exchange and brokerage without registration. 



“Since at least 2019, through the Coinbase Platform, Coinbase has operated as: an unregistered broker, including by soliciting potential investors, handling customer funds and assets, and charging transaction-based fees; an unregistered exchange,” court documents released Tuesday read.&nbsp;



The <a href="https://blockworks.co/tag/SEC">SEC</a> also claims that at least 13 tokens listed on Coinbase are securities. In its Binance complaint, the agency similarly listed <a href="https://blockworks.co/news/sec-10-tokens-securities">10 tokens as “crypto asset securities</a>.” Both lawsuits list Solana’s <a href="https://blockworks.co/price/SOL">SOL</a> token and Cardano’s <a href="https://blockworks.co/price/ADA">ADA</a> as securities.



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Coinbase Stock Tanks 16% Following SEC Lawsuit 

Coinbase is being sued by the SEC just a day after the SEC went after the world’s largest crypto exchange, Binance.&nbsp;



The <a href="https://blockworks.co/news/sec-sues-coinbase">SEC alleges that Coinbase operated</a> as an unregistered broker and sold unregistered securities — which are both allegations that have been <a href="https://blockworks.co/news/sec-allegations-against-binance">directed toward Binance as well</a>. 



The claims go back to 2019, despite the fact that <a href="https://blockworks.co/tag/Coinbase">Coinbase</a> was allowed to go public in 2021.  



Here’s a list of the claims the <a href="https://blockworks.co/tag/SEC">SEC</a> is making against Coinbase.  



<h2>Unregistered broker </h2>



The SEC alleges that “since at least 2019, through the Coinbase Platform, Coinbase has operated as: an unregistered broker, including by soliciting potential investors, handling customer funds and assets, and charging transaction-based fees; an unregistered exchange, including by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders; and an unregistered clearing agency, including by holding its customers’ assets in Coinbase-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant accounts.”



<h2>Unregistered “securities”</h2>



In the complaint, the SEC states that 13 crypto assets are “securities” including <a href="https://blockworks.co/price/SOL">SOL</a>, <a href="https://blockworks.co/price/ADA">ADA</a>, <a href="https://blockworks.co/price/MATIC">MATIC</a>, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO.



While there is some overlap between the allegations against Coinbase and those against Binance, some of these assets are newly-designated as securities by the SEC. It is unclear if the SEC has reached out to, or discussed, these designations with the token issuers.



The SEC targeted SOL, ADA, AXS, MATIC, FIL and SAND in <a href="https://blockworks.co/news/sec-10-tokens-securities">its lawsuit against Binance</a>.



<h2>Service targeted: Wallet, Staking and Prime </h2>



The Staking program offered by Coinbase allows investors to stake five crypto assets – XTZ, ATOM, ETH, ADA and SOL. 



The SEC claims that this service means that Coinbase is offering the sale of unregistered securities and that “Coinbase has deprived investors of material information about Coinbase and its Staking Program offerings, including how Coinbase uses the offering proceeds and the risks and trends that affect the enterprise and an investment in these securities.”



“At all relevant times, the Coinbase Staking Program, as it applied to each of the five stakeable assets, was an investment contract under Howey, and therefore a security, whose offers and sales were subject to registration under the Securities Act,” the suit claims.



Coinbase Wallet is another service that the SEC alleges was selling unregistered securities.&nbsp;



“Coinbase has carried out these functions despite the fact that the crypto assets it has Case made available for trading on the Coinbase Platform, Prime, and Wallet have included crypto asset securities, thus bringing Coinbase’s operations squarely within the purview of the securities laws. CGI—Coinbase’s parent company to which Coinbase’s revenues flow—is a control person of Coinbase and thus violated the same Exchange Act provisions as Coinbase,” the SEC claimed.



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SEC Sues Coinbase: Here’s What They Allege Coinbase Did Wrong

The SEC is suing Coinbase a day after it <a href="https://blockworks.co/news/sec-allegations-against-binance">went after Binance</a>.



In the lawsuit, filed on Jun. 6, the <a href="https://blockworks.co/tag/sec">SEC</a> alleges that Coinbase has been operating as an unregistered exchange.&nbsp;



The SEC names <a href="https://blockworks.co/tag/coinbase">Coinbase</a> and CGI — Coinbase’s holding company — as defendants in the suit. The lawsuit alleges:



“Since at least 2019, through the Coinbase Platform, Coinbase has operated as: an unregistered broker, including by soliciting potential investors, handling customer funds and assets, and charging transaction-based fees; an unregistered exchange, including by providing a market place that, among other things, brings together orders of multiple buyers and sellers of crypto assets and matches and executes those orders; and an unregistered clearing agency, including by holding its customers’ assets in Coinbase-controlled wallets and settling its customers’ transactions by debiting and crediting the relevant accounts.&#8221;



The commission also claims that <a href="https://blockworks.co/news/coinbase-hits-back-at-sec-over-staking-as-a-service" target="_blank" rel="noreferrer noopener">staking-as-a-service products offered</a> by Coinbase are in violation of the Securities Act of 1933 because “the Staking Program includes five stakeable crypto assets, and the Staking Program as it applies to each of these five assets is an investment contract, and therefore a security.”



Similar to the <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges" target="_blank" rel="noreferrer noopener">Binance suit filed</a> on Jun. 5, the SEC is alleging that Coinbase did not ensure that the crypto assets being sold were not securities as <a href="https://blockworks.co/news/ava-labs-howey-test-wrong" target="_blank" rel="noreferrer noopener">defined by the Howey test</a>.&nbsp;



Read more: <a href="https://blockworks.co/news/sec-allegations-against-binance">The SEC Allegations Against Binance: How Bad Is It?</a>



“But while paying lip service to its desire to comply with applicable laws, Coinbase has for years made available for trading crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities laws,” the SEC claims.



<ul>
<li>In the suit, the SEC labels 13 crypto assets as securities, specifically SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH and NEXO.&nbsp;</li>



<li>In the Binance lawsuit, <a href="https://blockworks.co/news/sec-10-tokens-securities">the SEC named SOL</a>, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS and COTI, as well as Binance’s native tokens, <a href="https://blockworks.co/price/BNB">BNB</a> and <a href="https://blockworks.co/price/BUSD">BUSD</a>.</li>
</ul>



The lawsuit is the latest in an ongoing battle between Coinbase and the SEC. The exchange was <a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation">served with a </a><a href="https://blockworks.co/news/sec-serves-coinbase-in-latest-alleged-crypto-securities-violation" target="_blank" rel="noreferrer noopener">Wells notice</a> earlier this year, which led Coinbase to <a href="https://blockworks.co/news/coinbase-sec-rulemaking-petition" target="_blank" rel="noreferrer noopener">sue the SEC</a>, asking for regulatory clarity. 



When the court <a href="https://blockworks.co/news/court-sec-deadline-coinbase" target="_blank" rel="noreferrer noopener">ordered the SEC to respond</a>, the regulator said that Coinbase could not make demands for regulatory clarity.&nbsp;



“The SEC&#8217;s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual,” Coinbase Chief Legal Officer Paul Grewal told Blockworks via email.



Updated June 6, 2023 at 10:11 am ET: Added comment from Coinbase&#8217;s Paul Grewal.



Updated June 6, 2023 at 8:38 am ET: Added context throughout.



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SEC Sues Coinbase for Alleged Securities Violations

Shalini Nagarajan

Data indicates Binance users have overall withdrawn almost $1.5 billion from the crypto exchange over the past day, as the firm grapples with a fresh Securities and Exchange Commission lawsuit over <a href="https://blockworks.co/news/binance-execs-unlicensed-securities-exchange" target="_blank" rel="noreferrer noopener">alleged securities violations</a>.



The SEC claimed the exchange and its CEO Changpeng Zhao lured US customers to their unregulated platform and mixed investors&#8217; funds with their own.



Assets on the platform last stood at just under $60.5 billion, according to <a href="https://defillama.com/cexs" target="_blank" rel="noreferrer noopener">DeFiLlama</a>.



In its lawsuit, the SEC <a href="https://blockworks.co/news/sec-allegations-against-binance" target="_blank" rel="noreferrer noopener">alleged</a> 10 cryptocurrencies including binance coin (<a href="https://blockworks.co/price/bnb" target="_blank" rel="noreferrer noopener">BNB</a>), its branded stablecoin <a href="https://blockworks.co/price/busd" target="_blank" rel="noreferrer noopener">BUSD</a>, as well as staking investment products offered on Binance.US are all <a href="https://blockworks.co/news/sec-10-tokens-securities" target="_blank" rel="noreferrer noopener">considered unregistered securities</a>.



The SEC also claimed Zhao directed creation of a plan to help wealthy customers evade US regulations. This involved using VPNs to hide their US locations and submitting compliance documents to conceal their true country of origin.



“We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it,” Zhao allegedly told senior Binance officials in 2019.



According to Konstantin Horejsi, chief product officer at digital asset trading platform Blocktrade, the outflows from Binance are likely to have mostly gone to US residents.&nbsp;



This is expected, Horejsi explained, due to the potential for frozen user assets. Although it&#8217;s considered unlikely, frozen assets can result in capital being locked away for a long time — which would lead to legal and bureaucratic challenges for Binance users.



“Projects operating on a chain that may face potential prohibition in the US might consider switching their infrastructure layer. This reduction in speculative value of the BNB chain and token price has consequently led to some outflows triggered by BNB fire sales,” he told Blockworks.



BNB immediately tanked up to 9% following word of the SEC’s charges, while bitcoin dropped up to 5%.



<h2>Binance users have pulled loads of funds before</h2>



Horejsi noted that Binance has dealt with days of large outflows in the past and has handled them well.&nbsp;



“Therefore, I wouldn&#8217;t be overly concerned about their ability to meet the outflow demands,” he said. Blockworks has reached out to Binance for comment.



Following the <a href="https://blockworks.co/news/bitcoin-and-ether-are-commodities-says-cftc-in-binance-lawsuit" target="_blank" rel="noreferrer noopener">lawsuit filed against</a> Binance by the Commodity Futures Trading Commission in March, the exchange <a href="https://www.wsj.com/articles/binance-sees-2-billion-in-outflows-as-troubles-compound-9a136e21" target="_blank" rel="noreferrer noopener">reportedly</a> witnessed net outflows of $2.1 billion over a span of seven days.



Horejsi said that traders are now increasingly inclined to seek out regulated and audited exchanges rather than solely opting for convenience.



“In my opinion, Coinbase and Kraken are primarily benefiting from this trend in the US market. However, for international users, trust in Binance remains relatively high,” he said.



For what it&#8217;s worth, Binance expressed disappointment with the SEC&#8217;s charges and claimed they came as a surprise. The exchange said it had been actively cooperating and engaging in good-faith negotiations.



“The SEC’s choice is disheartening for Binance, its users, and the industry as a whole.&nbsp;However, this action will not stop us from continued robust collaboration with other regulators and policymakers across the globe, and we will continue to vigorously defend our business and this technology,” a spokesperson said.



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Binance Users Pull $1.5B Amid Sweeping SEC Charges

The Commodity Futures Trading Commission (CFTC) has given the green light for Cboe Global Markets to offer crypto more products as a derivatives clearing organization under the Commodity Exchange Act.



Cboe Digital, a platform that handles crypto spot and crypto derivatives markets, received the go-ahead to provide leveraged derivatives once the contracts are introduced in the latter half of the year.



The updated order allows Cboe Clear to offer clearing services for digital asset futures on a margin basis to futures commission merchants. This is in addition to the previously authorized fully collateralized futures and swaps, according to a Monday <a href="https://www.cftc.gov/PressRoom/PressReleases/8712-23" target="_blank" rel="noreferrer noopener">statement</a>.



Cboe Digital also supports spot trade for cryptocurrencies including bitcoin (<a href="https://blockworks.co/price/btc" target="_blank" rel="noreferrer noopener">BTC</a>), bitcoin cash (<a href="https://blockworks.co/price/bch" target="_blank" rel="noreferrer noopener">BCH</a>), ether (<a href="https://blockworks.co/price/eth" target="_blank" rel="noreferrer noopener">ETH</a>), litecoin (<a href="https://blockworks.co/price/ltc" target="_blank" rel="noreferrer noopener">LTC</a>) and <a href="https://blockworks.co/price/usdc" target="_blank" rel="noreferrer noopener">USDC</a>.



CFTC Commissioner Christy Goldsmith Romero <a href="https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement060523b" target="_blank" rel="noreferrer noopener">said</a> the updated registration order lets Cboe clear more crypto futures contracts, while implementing careful risk-reducing measures.



Cboe’s application is quite unlike FTX’s application for a direct-to-customer market structure without any middlemen, according to Romero. FTX’s application was withdrawn after the company filed for bankruptcy in November.



“The proposed FTX model was never adopted by the Commission, but it put at risk customers’ bankruptcy priority, other customer protections, and financial stability,” she said.



Cboe&#8217;s clearinghouse has been registered with the Commission since 2019. Its parent company Cboe, headquartered in Chicago, has over 50 years of experience running exchanges in regulated futures, options, foreign exchange, and equities markets, she added.



Shortly after acquiring crypto exchange and clearinghouse ErisX last year, Cboe Digital <a href="https://blockworks.co/news/cboe-to-add-slate-of-partners-to-grow-digital-asset-business" target="_blank" rel="noreferrer noopener">partnered</a> with companies like Jump Crypto, Interactive Brokers, and Robinhood to expand its digital asset business.



“We’ll integrate only where it makes sense, but we realize that in this asset class we need to move quickly,” Cboe COO Chris Isaacson <a href="https://blockworks.co/news/cboe-sees-need-to-move-quickly-in-crypto-following-exchange-acquisition" target="_blank" rel="noreferrer noopener">told</a> Blockworks after the closing of the ErisX deal. “Keeping that agility with this wholly-owned subsidiary is a great move.”  



Cboe said it intended to create a digital advisory committee composed of the partner firms.



There’s currently $11.95 billion in bitcoin open interest and $6.17 billion in ether open interest across 12 platforms, excluding Cboe Digital’s ErisX, per <a href="https://www.coinglass.com/BitcoinOpenInterest" target="_blank" rel="noreferrer noopener">CoinGlass</a>.



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Amid Crypto Chaos, CFTC Approves Cboe For Futures Margin Trade

US federal prosecutors got their way in the Reginald Fowler case, with a New York judge imposing an approximately six-year prison term on the convicted crypto fraudster.&nbsp;



Fowler’s sentence stemmed from the fact that he “evaded federal law by processing hundreds of millions of dollars of unregulated transactions on behalf of cryptocurrency exchanges as a shadow bank,” US Attorney Damian Williams said in a statement on Monday.&nbsp;



Prosecutors in April <a href="https://blockworks.co/news/reggie-fowler-shadow-bank-crypto-capital-corp">pushed for a seven-year prison term</a>, plus fines amounting to over $720 million.&nbsp;



The bank fraud is tied to Fowler’s time running Global Trading Solutions (GTS). The former Minnesota Vikings minority owner pleaded guilty last April to lying to banks in order to process more than $700 million in “unregulated” crypto transactions, the Southern District of New York said in a <a href="https://www.justice.gov/usao-sdny/pr/former-co-owner-minnesota-vikings-sentenced-75-months-prison-providing-shadow-banking">statement</a>.&nbsp;



“Fowler evaded federal law by processing hundreds of millions of dollars of unregulated transactions on behalf of cryptocurrency exchanges as a shadow bank,” Williams said. “He did so by lying to legitimate U.S. financial institutions, which exposed the U.S. financial system to serious risk.”



The shadow bank, Crypto Capital Corp, was established to process transactions for crypto startups operating by choice or necessity outside of the traditional banking system.&nbsp;



Bitfinex was also wrapped up with Crypto Capital, <a href="https://blockworks.co/news/reggie-fowler-shadow-bank-crypto-capital-corp">giving the payment processing firm $850 million</a> to process customer withdrawals. New York Attorney General Letitia James alleged in 2021 that <a href="https://blockworks.co/news/tethers-settlement-with-the-nyag-a-positive-for-industry">Tether loaned Bitfinex the $850 million</a> to cover the loss.&nbsp;



Prosecutors said Fowler personally opened dozens of accounts that processed crypto transactions without the knowledge of the banks involved.&nbsp;&nbsp;



Fowler has been ordered to forfeit $740.2 million of the proceeds.



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Reggie Fowler Gets Over 6 Years for Crypto Scheme, Ordered to Forfeit $740M

The SEC’s lawsuit against Binance <a href="https://blockworks.co/news/sec-allegations-against-binance">makes a number of allegations against the world’s largest crypto exchange</a> as well as the other defendants – which include CEO Changpeng Zhao.&nbsp;



In the lawsuit, the <a href="https://blockworks.co/tag/SEC">SEC</a> cites internal communications, including emails and various quotes from <a href="https://blockworks.co/tag/binance">Binance</a> employees.



The SEC is <a href="https://blockworks.co/news/binance-changpeng-zhao-face-sec-charges">claiming that Binance, alongside BAM Trading and CZ</a>, violated securities laws.&nbsp;



<a href="https://blockworks.co/news/binance-pushes-back-sec-lawsuit">Binance, however, disputes the claims</a> calling them both “disheartening” and “disappointing.”



In a common US regulatory practice, the SEC in its suit refers to employees of Binance and its affiliates by their job titles — without identifying them.



Here’s what the SEC is claiming that Binance employees have said in relation to its claims.



<h2>Changpeng Zhao&nbsp;</h2>



Zhao is named throughout the suit — both in quotes, and because he’s a defendant.



He allegedly pushed Binance to “encourage customers to circumvent Binance’s geographic blocking of U.S.-based IP addresses by using a VPN service to conceal their U.S. location.” And the CCO drafted a “VIP handling document” which “instructed Binance employees to make sure the U.S. customers opened new accounts ‘with no US documents allowed’ and to inform the customer ‘to keep this confidential.’” 



“We don’t want to lose all the VIPs which actually contribute to quite a large number of volume. So ideally we would help them facilitate registering companies or moving the trading volume offshore in some way—in a way that we can accept without them being labeled completely U.S. to us,” Zhao allegedly said in June 2019 during a “weekly meeting of senior Binance officials.”



In a meeting a few days later, Zhao said, “We do need to let users know that they can change their KYC [know-your-customer information] on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it.”



“A few days later, Binance’s Chief Marketing Officer reported that the team had reached out to the top 22 U.S. VIP customers and that 19 had “already agreed to change KYC, or change their IP,” the lawsuit said in the sole mention of the CMO.



<h2>Binance’s CCO</h2>



One of the most quoted people in the 136-page lawsuit is a Binance CCO.



The quote that will probably become infamous is one from December 2018: “We are operating as a fking unlicensed securities exchange in the USA bro.”



But they also allegedly said that “we do not want [Binance].com to be regulated ever.” Going on to say, per a screenshot included in the suit, that Binance “created local entities to be registered with the regulators, and ringfence accordingly. So BAM, BAS, etc. These are entities that are regulated/licensed.”



In a communication from 2020, a screenshot shows a Binance CCO allegedly saying that “on the surface, we cannot be seen to have US users, but in reality, we should get them through other creative means.”



In relation to the alleged VIP handling, the CCO is quoted as saying, “[W]e ask them to onboard with US, and then if their volume is really very big … we will push hard on .com side to accept it on an exceptional basis … we always have a way for whales … either we do it, or [a competitor crypto trading platform] does it.”&nbsp;



The CCO allegedly went on to add, “CZ will definitely agree to this lol … I have been briefed by top management to always find a way to support biz.”



<h2>Binance CFO</h2>



A Binance chief financial officer allegedly told Zhao that the ‘first goal’ was “to protect [Binance].com from U.S. regulatory engagement.” To do so, he noted that Binance will need to launch a new US crypto asset platform, and that “the main goal for that one is to limit the loss of users from the U.S.”&nbsp;



The lawsuit also includes 2019 conversations between the CCO and the CFO over listing BNB on the Binance.US platform.



“In an internal chat in September 2019, the Binance CFO and the Binance CCO agreed that “CZ [wa]s willing to take the legal risk in listing BNB, if [they could] find a way to quantify it,” the lawsuit claims.&nbsp;



“Cutting US from .com already [cost] him an arm/leg, he’s not gonna hold back on getting that rev[enue] back somehow,” the CCO is quoted as saying in response.



In the event of either a Wells notice or subpoena — which both the CFO and the CCO allegedly acknowledged were possible following the SEC’s enforcement action against Kik Interactive — reportedly said that they would “start prepping everything” which included a “war chest.”



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