Is your digital asset exchange compliant with the regulations? | Perspective.

The United States Securities Exchange Commission (SEC) has successfully approved eleven Bitcoin ETFs after years of dedicated efforts by fund managers. This significant milestone has effectively institutionalized Bitcoin, allowing digital assets to become a permanent part of investors' portfolios in the US. However, it is important for digital asset investors to exercise caution as the SEC is currently engaged in legal battles with Coinbase and Binance, the two largest digital asset exchanges. These regulatory actions by federal agencies such as the SEC, CFTC, FinCEN, IRS, and OFAC in 2023 demonstrate their commitment to protecting investors and combating misconduct in the digital asset industry, both domestically and internationally.


It is worth noting that the United States remains the leading country in terms of traffic to digital asset exchanges, followed by India, Indonesia, and Turkey, as highlighted in Coincub's latest report.

Erhan Kahraman, an editor at Cointelegraph, provided insights into the surge of Turkish investors' engagement in unregulated digital asset exchanges. According to him, the Coincub's 'Crypto exchanges traffic report 2023' aligns with the prevailing notion of cryptocurrencies serving as a safeguard against inflation. In Turkey, prominent crypto exchanges like Binance, Btc Turk, and Paribu are significantly contributing to this trend, occupying the top three positions respectively. These exchanges have established a strong presence through extensive advertising campaigns on billboards along highways, TV commercials, and strategic partnerships with renowned sports teams. This aggressive marketing approach caters to the Turkish population's relentless pursuit of quick wealth accumulation, driven by the absence of a dependable economic framework. As Erhan further elaborates:

Turkey has faced a significant surge in inflation rates, particularly in the aftermath of the COVID-19 pandemic. Inflation figures escalated from 20%, which is already considered high, to over 60% in 2023. At the beginning of 2023, the value of Bitcoin stood at approximately 400,000 Turkish liras, and by the end of the year, it reached approximately 1.2 million Turkish liras.

According to the report, Binance, the leading digital asset exchange in Turkey and globally, has recorded more than 1 billion visits. On the other hand, Coinbase, positioned as the second-largest exchange worldwide, holds the top spot in the United States with 549 million visits. Impressively, Coinbase attracts over 50% of the US traffic share.

Crypto exchanges traffic report 2023 | Source: Coincub

However, lawsuits have arisen between the Securities and Exchange Commission (SEC) and both Coinbase and Binance, the two largest digital asset exchanges in the United States and the world. These lawsuits stem from their failure to comply with numerous federal securities laws. The main goals of these laws are twofold: firstly, to ensure that investors are provided with relevant financial and other important information regarding securities offered for public sale, and secondly, to prevent any form of deception, misrepresentation, or fraudulent activities in the sale of securities. In relation to the ongoing legal dispute with Coinbase, which acts as a custodian for a majority of the BTC ETFs, SEC Chair Gary Gensler has provided clarification.

The federal securities laws are applicable if crypto assets are offered and sold as investment contracts and if entities facilitate transactions involving crypto asset securities.

In the United States, digital assets have garnered significant attention from both federal and state governments, especially following the bear market of 2022. At the federal level, the primary focus has been on administrative and agency actions, with entities such as the SEC, CFTC, and the Department of the Treasury (through the IRS, FinCEN, and OFAC) taking the lead. Although these agencies have actively enforced regulations to safeguard investors, there has been a lack of substantial formal rulemaking.

An examination of federal enforcement actions targeting digital asset exchanges in 2023.

The 2023 reports on federal enforcement actions issued by the SEC, CFTC, FinCEN, IRS, and OFAC reveal that only a small number of digital asset exchanges are actually complying with the relevant laws, despite being involved in the highest levels of digital asset activity worldwide.

Version 1: The report details from the Securities Exchange Commission (SEC) on cryptocurrencies provides detailed information on 46 enforcement actions taken against various participants in the digital asset market. Out of these, 26 (57%) were related to alleged fraud, 28 (61%) were related to alleged violations of unregistered securities offerings, and 17 (37%) involved both.

The most notable cases involving digital asset exchanges were the SEC's actions against the former CEO of FTX, who was charged with defrauding equity investors, as well as Binance, Coinbase, and Kraken.

Version 2: According to the report details from the Commodity Futures Trading Commission (CFTC) on digital assets, there were a record-breaking 47 actions taken in cases related to digital asset commodities. These actions included significant court decisions in complex litigations, solidifying the CFTC's reputation as a leading enforcement agency in the digital asset industry.

The most high-profile case involving a digital asset exchange was the CFTC's action against Binance. Sergiu Hamza, the CEO of Coincub, explained to me the regulatory challenges faced by Binance on a global scale. Despite facing a lawsuit from the SEC for multiple violations of federal securities laws, Binance remained the second-largest exchange in the US last year, attracting nearly 34.5 million visitors. Binance.US, the separate US exchange launched by Binance, ranked seventh with 17.8 million visits. Sergiu further highlighted that even after incurring billions of dollars in fines over the course of four years, Binance continues to court trouble, not only in North America. Binance has not listed any of its MSB licenses in the US and Canada, and although it announced its departure from Canada, it still received 14 million visits.

Additionally, Binance faced bans in India and the Philippines, yet managed to attract 75 million and 2.5 million visits from these countries, respectively.

Binance and its leaders have been accused of fraudulent management, unauthorized offering or trading of securities, and operating a financial institution without consent, according to a comprehensive 500-page report from Brazil. Despite these allegations, the exchange saw a significant influx of visitors from Brazil, with 18 million individuals accessing the platform last year. Interestingly, Binance announced its decision to withdraw from the Russian market in September, even though Russia ranks as their fifth largest market in terms of traffic, with a substantial number of visits. Additionally, Binance faced a setback in the Netherlands as it was denied a license, yet it still managed to attract 11.2 million visits from users. On a global scale, Binance established its headquarters in Malta, but EU regulators suspect the exchange of evading taxes and creating false accounts in both Malta and Ireland. Nevertheless, Binance received 365,000 visits from Malta and 3.5 million visits from Ireland. In the prohibited Chinese market, Binance conducted monthly transactions worth $90 billion and garnered 4.4 million visits in the previous year. Despite facing a ban in Belgium in June, Binance redirected its users to Poland, resulting in 6 million visits. Similarly, Taiwan implemented restrictions on unregistered foreign crypto exchanges, including Binance, yet the platform still managed to attract 8.7 million visits from 2.2 million unique visitors in the past year. In July, the global crypto exchange was banned by the SEC in Nigeria, but it received 9.2 million visits in the same year. Furthermore, Malaysia and South Africa's financial regulators issued warnings against Binance, stating that the exchange is not authorized to operate in their respective countries and took enforcement actions against it. Despite these warnings, Binance still recorded 9.5 million visitors from Malaysia and 4 million visits from South Africa last year.

The Financial Crimes Enforcement Network (FinCEN) has taken action against Bitzlato Limited, a digital asset exchange, for its involvement in facilitating illegal transactions associated with Russian money laundering. Additionally, FinCEN has imposed a substantial penalty of $3.4 billion on Binance, marking the largest penalty ever imposed by FinCEN. According to Jim Lee, Chief of the IRS Criminal Investigation Unit (IRS-CI), there has been a significant rise in cases related to digital tax evasion. Approximately half of the ongoing investigations involving digital assets are focused on tax matters, ranging from failure to report income from capital gains or mining activities to intentional non-disclosure of cryptocurrency holdings. Among the IRS-CI's top 10 high-profile cases for 2023, four are related to digital assets. As part of the Joint Chiefs of Global Tax Enforcement (J5) cyber challenge, which aims to combat transnational tax-related crimes, data mining and AI have been instrumental in generating over 50 leads on potential tax crimes and money laundering involving cryptocurrency. Jim Lee, Chief of the IRS-CI, expressed the effectiveness of these challenges in uncovering complex cases with significant financial implications across multiple jurisdictions.

However, the outcomes should not come as a shock to anyone. Whenever you bring together highly intelligent individuals from diverse backgrounds, equip them with the necessary data and tools, and foster an environment that prioritizes collaboration, remarkable results are bound to occur consistently.

The Office of Foreign Assets Control, also known as OFAC, has recently taken action by issuing 17 enforcement measures. Among these actions, three specifically targeted digital asset exchanges, resulting in civil penalties exceeding $1.5 billion. This amount is nearly four times higher than the civil penalties imposed by OFAC in 2022. Notably, OFAC's settlement with Binance, amounting to $970 million, stands as the most substantial penalty in the organization's history.

Conclusion

Coincub's "Crypto exchanges traffic report 2023" predicts that the digital asset exchange industry will undergo significant changes in 2024. Previously dominated by major players such as Binance, Coinbase, and Kraken, this sector will witness a paradigm shift. The landscape will evolve rapidly due to increased global regulatory scrutiny, technological advancements, market competition, and changing consumer preferences. Therefore, it is crucial for investors to stay updated on the regulatory compliance practices of digital asset exchanges. For instance, Circle, the issuer of the second largest stablecoin USDC and backed by Coinbase, is preparing for a confidential IPO. Additionally, Kraken recently informed its clients that they will be required to provide sensitive client tax data to the IRS following a court case. Kraken submits Forms 1099-MISC to the IRS for US clients who earned over $600 in digital asset rewards or staking, but does not report crypto capital gains or losses. The IRS advises investors to continue reporting their digital asset income on tax forms such as 1040, 1040-SR, 1040-NR, 1041, 1065, 1120, and 1120-S, with an April 15, 2024, tax deadline. It is important to acknowledge that the IRS has implemented various measures to streamline its approach in addressing the significant impact of digital assets on tax administration.