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Binance Faces Lawsuit in Canada for Selling Crypto Derivative Products Without Registration

Binance, the leading players in the cryptocurrency trading industry, has been hit with a class-action lawsuit in Canada. The Ontario Superior Court of Justice has given the green light to the lawsuit, which alleges that Binance violated securities laws by selling crypto derivative products to retail investors without proper registration [1].

The plaintiffs, represented by Christopher Lochan and Jeremy Leeder, argue that Binance’s actions were in violation of the Ontario Securities Act and federal law. They claim that Binance failed to register as required by securities law and neglected to file a prospectus for the derivative products it sold to Canadian investors [2].

The certification motion for the class-action lawsuit highlights the significant presence of retail investors in cryptocurrency derivatives trading in Canada. According to the Ontario Securities Commission (OSC), over 50% of Canadian crypto owners hold at least $5,000 worth of cryptocurrency [2]. This underscores the potential impact of the lawsuit on a large number of investors.

The plaintiffs seek damages and the rescission of the unlawful derivatives trades conducted on the Binance platform. They argue that Binance’s failure to comply with registration requirements and file a prospectus renders the sales illegal and voidable [2].

Regulators have previously classified crypto contracts as securities or derivatives, bringing the marketing of such contracts under securities law. This classification has led to increased scrutiny of platforms like Binance, which offer crypto derivative products to retail investors [2].

Binance’s history with Canadian investors has already attracted regulatory attention. Despite previous pledges to cease doing business with local investors in 2021 and agreements with the Ontario Securities Commission (OSC) in 2022, Binance is still under investigation for possible violations [2]. The outcome of this lawsuit could have significant implications for the cryptocurrency industry, particularly in terms of regulatory oversight and investor protection.

It is estimated that tens of thousands of Canadian users were affected by Binance’s alleged violations. The plaintiffs argue that Binance’s actions not only violated securities laws but also had a direct impact on retail investors who purchased the crypto derivative contracts from the platform starting on September 13, 2019 [3].

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Token Taxonomy Act that Will Exempt Cryptocurrencies from Securities Laws Reintroduced in US Congress

A crypto bill suggesting that certain cryptocurrencies should be exempted from securities laws has been reintroduced to the US Congress for review.

The bill was first introduced in 2018 by Representative Warren Davidson (R-Ohio), who is the official sponsor of the proposed regulatory measure.

Dubbed the Token Taxonomy Act, the proposal is also sponsored by Congressman Darren Soto and the Blockchain Association. Representatives Josh Gottheimer, Tedd Budd, Scott Perry, and Tulsi Gabbard co-sponsored the 2019 version of the bill. Although the current version of the proposal is Version 3.0, it is no different from the previous ones.

The Token Taxonomy Act aims to exempt certain cryptocurrencies and tokens from US securities laws. It is not the first time that the bill has made its way to Congress. Currently, this is the third attempt by Davidson prompting the US House of Representatives to address this issue, which would be major for the crypto industry. The bill is pending approval from the House of Representatives. If approved there, it will then make its way to the Senate.

The bill seeks to “amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security.”

Additionally, it aims to prompt the Securities and Exchange Commission “to enact certain regulatory changes” regarding cryptocurrency and “to adjust taxation of virtual currencies held in individual retirement accounts.”

If approved, it would mean that certain cryptocurrency transfers will be exempted from taxation in the US.

SEC criticized for lack of crypto clarity

The SEC has long been criticized for its take on cryptocurrencies, with many industry leaders alleging that the regulatory body has failed to lay out a clear regulatory framework for digital assets. Many have blasted the SEC and said that the lack of clear crypto regulations has dampened innovation in the industry. One of the many accusing the SEC of incompetence in regulating cryptocurrencies is Ripple.

Currently, the fintech firm is facing a lawsuit from the agency regarding XRP. The SEC alleges that Ripple and its lead executives are in violation of securities laws with XRP, as it claims that the digital asset should be classified as a security. Ripple has pushed back, refuting the SEC’s arguments. In addition to stating that the FinCEN had already classified XRP as a virtual currency in 2015, Ripple also stated that the United States is the only G20 member that has been adamant in viewing XRP as a security – what many industry leaders have labelled as the SEC’s lame attempt at fitting a square peg in a round hole.

Perhaps with Gary Gensler as the future Chairman of the SEC, crypto innovation will be brought to another level in the United States, as the current nominee has long been praised for his expertise regarding blockchain and crypto.

Paradigm Challenges SEC's Authority in Lawsuit Against Binance

On September 29, 2023, Paradigm filed an amicus brief in the ongoing lawsuit between the U.S. Securities and Exchange Commission (SEC) and Binance, a leading cryptocurrency exchange. Paradigm is not an investor in Binance and has no direct financial interest in the lawsuit’s outcome. However, the firm believes that the SEC’s actions represent a form of government overreach that could have significant implications for the broader financial and crypto markets.

The SEC initiated legal action against Binance in June 2023, accusing the exchange of multiple violations of securities laws. These include operating without the necessary licenses and registrations as an exchange, broker-dealer, or clearing agency. The SEC’s investigation into Binance began in May 2023. In its amicus brief, Paradigm argues that the SEC is attempting to change existing laws without adhering to the established rulemaking process, thereby acting outside its regulatory scope.

Paradigm’s brief raises several critical points that challenge the SEC’s interpretation of securities law. The firm argues that the SEC’s expansive interpretation of “investment contract” could bring a wide range of asset sales under the purview of securities laws. Paradigm also highlights flaws in the SEC’s application of the Howey test, a legal standard used to determine what constitutes a security.

Circle, a stablecoin services company specializing in blockchain technology, has also been brought into the legal battle between Binance and the SEC as well. Circle argues that stablecoins, a type of cryptocurrency designed to maintain a stable value, should not be treated as securities, adding another dimension to the ongoing case.

Paradigm emphasizes that regulatory gaps do exist in the crypto sector and that it is Congress’s responsibility to fill these gaps. This perspective aligns with SEC Chair Gary Gensler’s Congressional testimony, where he acknowledged the SEC’s limitations in regulating crypto secondary markets.

Paradigm’s amicus brief serves as a significant counterpoint to the SEC’s actions against Binance and other crypto exchanges. By challenging the SEC’s authority and interpretation of securities law, Paradigm adds a layer of complexity to an already intricate legal landscape. The firm’s stance could potentially influence how securities laws are applied to the crypto industry in the future.

FINRA Identifies Widespread Violations in Crypto Communications

The Financial Industry Regulatory Authority (FINRA) has identified a staggering rate of potential regulatory violations. In a targeted exam initiated in November 2022, FINRA reviewed over 500 retail communications related to crypto assets from member firms. The findings, disclosed in January 2024, reveal that approximately 70% of these communications potentially violated FINRA’s Rule 2210, which governs communications with the public.

Rule 2210 is a cornerstone regulation that ensures fairness and balance in broker-dealer communications. It prohibits false, exaggerated, promissory, unwarranted, or misleading claims, and demands that any communication provide a sound basis for evaluating the facts regarding any product or service discussed. The rule is critical in maintaining market integrity and protecting investors from misleading information.

The violations identified by FINRA primarily involve misleading statements and comparisons about crypto assets. These include false implications that crypto assets function like cash or equivalent instruments, unclear and misleading explanations of crypto assets’ operations, and comparisons of crypto assets with other assets, like stocks or cash, without a sound basis. Notably, some communications falsely suggested that crypto assets were protected by federal securities laws or FINRA rules, or misleadingly stated the extent to which certain crypto assets are protected by the Securities Investor Protection Corporation (SIPC).

This review is part of FINRA’s ongoing efforts to regulate the burgeoning crypto market. It comes in the wake of increased interest in crypto assets and the potential harm caused by problematic communications in this rapidly evolving market. The findings underscore the need for member firms to rigorously adhere to regulatory standards, especially in a market as volatile and complex as cryptocurrencies.

FINRA’s report is more than a mere compilation of compliance issues; it serves as a vital tool for member firms to refine their communication strategies. The high rate of non-compliance in crypto communications highlights the need for heightened vigilance and adherence to regulatory standards. As the crypto industry continues to evolve, FINRA’s oversight and subsequent regulatory actions will play a crucial role in shaping the landscape of cryptocurrency and its integration into the broader financial system.

FINRA’s findings are a stark reminder of the growing pains of the crypto industry and the importance of rigorous oversight. The organization’s role may be further influenced by an upcoming Supreme Court decision regarding the SEC’s use of in-house judges, which could have repercussions for FINRA’s own practices. This decision follows a 2023 ruling by the Court of Appeals for the District of Columbia Circuit against FINRA’s use of these judges.

In summary, the report from FINRA serves as a critical reminder of the challenges facing the crypto industry and the importance of maintaining high standards of regulatory compliance. As the crypto market continues to grow and attract investor interest, the role of regulatory bodies like FINRA in ensuring market integrity and investor protection becomes increasingly vital.

Genesis settles with the SEC, agreeing to a $21 million penalty

Genesis Global Capital, LLC has consented to a substantial $21 million fine to resolve Securities and Exchange Commission (SEC) charges. The SEC’s announcement on March 19, 2024, detailed the charges against the firm for the unregistered offer and sale of securities through its crypto asset lending program, known as the Gemini Earn program.

This settlement illuminates the SEC’s intensified focus on crypto lending platforms and the necessity for compliance with traditional securities laws. As stated by SEC Chair Gary Gensler, the action reinforces the message that adherence to investor protection laws is not only crucial for maintaining market integrity but is also a legal requirement.

The case against Genesis stems from the operation of the Gemini Earn program, where customers, including U.S. retail investors, loaned their crypto assets to Genesis in return for interest payments. However, the program faced severe liquidity issues in November 2022, prohibiting approximately 340,000 investors from withdrawing their crypto assets valued at around $900 million.

Genesis, without admitting or denying the allegations, agreed to the entry of a final judgment enforcing a permanent injunction against future violations of Section 5 of the Securities Act. This marks a significant effort by the SEC to bring crypto-asset market participants under the purview of traditional financial regulations and to ensure the protection of investors in this rapidly evolving market.

The Genesis case serves as a reminder of the precarious nature of the cryptocurrency market and the importance of regulatory compliance. It also underscores the potential risks investors face when engaging with digital asset platforms that sidestep federal securities laws.

The SEC’s action against Genesis follows its January 2023 charges against both Genesis and Gemini Trust Company, LLC, with the latter still facing ongoing litigation in the district court. The SEC’s investigation into the matter was spearheaded by a dedicated team, evidencing the commission’s commitment to thorough enforcement in the crypto space.

As the industry continues to grapple with regulatory frameworks, this case highlights the need for crypto lending platforms and other intermediaries to prioritize investor protection through compliance. With the SEC’s steadfast approach to enforcement, the crypto market is likely to see increased efforts to align with established securities laws, promoting greater market trust and stability.