The SEC Sues Coinbase & Binance. What does it mean for Sports x Web3?

Thanks to the 2,698 readers who are exploring where Sports meets Web3. If you're reading this and still haven't signed up, click the subscribe button!

Introduction 🔌🔧

🚨🔌 Some big Sporting Crypto news, we launched a job board today! 

You can find it here, and please feel free to reply to this newsletter if you have any questions about it!

The SEC sues Coinbase & Binance. What does it mean for Sports and Web3?

The Sporting Crypto Newsletter is supported by The HBAR Foundation.

This week has been nuts.

The SEC have sued Binance and Coinbase.

Messi is going to play for Inter Miami in the MLS.

Apple released a generational product with Apple Vision Pro.

The PGA and LIV golf merged.

Poor Circle, obtained a Major Payment Institution (MPI) License from the Singapore Central Bank and there’s no room for that in the headlines!

But the big news I’m focusing on in this edition is the SEC filing suits against the two biggest crypto exchanges in the world.

Last week the SEC (Securities Exchange Commission) in the United States dropped a bombshell; they were going to sue Binance, the world’s biggest Crypto exchange.

They followed up that announcement the very next day, filing a suit against leading US-based exchange Coinbase.

In today’s newsletter, I cover:❓ What has actually happened here?🔮 What will the outcome be?⚽ Coinbase and Binance sports partnerships📖 Deep dive into the filings

❓What has actually happened here?

The SEC has sued the two largest crypto exchanges in the world.

Binance, who have operated in quite an ‘unorthodox’ manner since their inception, were sued on Monday, and another suit, this time on Coinbase went in the following day on Tuesday.

Let’s add context and summarise the two suits quickly:Binance:

• The SEC have filed a suit against Binance’s US arm and their CEO, Changpeng Zhao (CZ)

• The SEC alleges that CZ and Binance exercise control of the platforms’ customers’ assets, permitting them to commingle customer assets or divert customer assets as they please

• They allege that Binance are operating unregistered national securities exchanges, broker-dealers, and clearing agencies in the US.

• They also allege that Binance’s own tokens, BNB and their stablecoin BUSD are both securities

• Binance lawyers allege SEC Chair Gensler offered to serve as an advisor to the crypto company in 2019

• In 2018 the CCO of Binance said “We are operating a f***ing unlicensed securities exchange in the USA bro”

In total, there are 13 claims made against Binance.

Coinbase:

• In late April, Coinbase actually sued the SEC for answers on rules specific to digital assets

• Coinbase were charged this week for operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.

🔮 What will the outcome be?

The honest answer is; nobody knows. And I’m definitely not a lawyer, so take whatever I say here with a fistful of salt.

First of all, these two suits are both very different.

The SEC likely don’t have a strong case that the alleged assets traded on either exchange are securities, because if they did they would have gone for the assets directly, as they’ve done with Ripple (XRP) previously.

On the Binance side, they likely do have several things that will stick due to insider testimony, including fraud, misuse of assets and such.

On the Coinbase side, there are three considerations:

1. Securities violations

2. Coinbase’s staking service

3. The allegation that Coinbase’s wallet service is an unregistered broker dealer

I think, and from what I’ve read, that if this was to go to court 1) and 3) would likely be something Coinbase could fight and potentially win. Especially 3), which seems fairly crazy considering the Coinbase wallet is a non-custodial one.

One of the biggest issues on the Coinbase side is that they are a publicly traded company, and their IPO was granted by the SEC 2+ years ago. Counterintuitive, I know. You’d think that the SEC wouldn’t let an unregistered broker-dealer and exchange listing unregistered securities list publicly, but what do I know?

Brian Armstrong, Chairman and Co-Founder of Coinbase hit back at the suit with the following tweet:

It outlines a few things:

1. The SEC reviewed Coinbase and allowed them to become a public company 2 years ago

2. Coinbase reject 90% of the assets that attempt to list on their exchange

3. The SEC and CFTC are conflicting in their thoughts on how to regulate crypto in the US

4. The rest of the world is moving at a good pace to regulate crypto, and the US is lagging

5. The SEC is trying to regulate by enforcement, and not by showing clear paths to compliance 

On number (4), I do think that apart from maybe Australia, the US have possibly positioned itself as one of the least progressive crypto hubs worldwide.

The FCA in the UK have recently tightened advertising standards when it comes to crypto, and the All Parliamentary Group for Crypto and Digital Assets have released their report recommending swift and robust regulation to ensure the UK becomes a global hub for crypto and fintech innovation.

In the past few weeks, the EU Formally signed new crypto licensing and ML rules into law, called MICA.

In Asia, USDC stablecoin creator Circle announced it had been approved as a Major Payment Institution (MPI) by the Monetary Authority of Singapore (MAS).Bryan Armstrong in this clip told Bloomberg “that they have met the SEC in the past year, circa 30 times” and that “they welcomed feedback” from the regulator — but were met with silence.

There is a mistaken conviction (in my opinion) that crypto can fit into current regulatory guidelines in the US. That opinion is clearly shared by regulators worldwide who are moving to create regulatory frameworks for crypto. I don’t think the US is at ‘war’ with crypto, but I do think it’s naive for them to think shoehorning this nascent technology into current frameworks is the right thing to do.

As per the excellent Noelle Acheson:

So it seems that the absolute worst case for Coinbase is to move offshore and pay a fine… which isn’t ideal for US customers who custody their crypto on the exchange… considering the bulk of their clientele is located in the US.

The most likely scenario I think is that Coinbase pay a fine because two of the three lines of reasoning (securities listing and wallets being broker-dealers) are very unlikely to stick. Either way, this doesn’t seem like it’s going to be resolved any time soon.

The Binance suit, is messier, however. And there’s no knowing how that one ends up.

The precedent both these suits could create is very important for the future of the industry, and the future of the USA’s future within the crypto industry.

⚽ Coinbase and Binance sports partnerships

What are the sports implications?

There are two main ones:

1. Sponsorships and partnerships: Binance and Coinbase sponsor a plethora of sports assets

2. Two of the tokens listed in the Coinbase suit are CHZ (Chiliz) and FLOW (The Flow Blockchain’s native token)

(Let’s leave (2) for a second because that needs an entire, dedicated section of this newsletter further down.)

Coinbase signed an exclusive deal with the NBA and WNBA, NBA G League, NBA 2K league and USA basketball — as well as signing NBA star Kevin Durant as an ambassador and partner.

In July 2022, Coinbase sealed a sponsorship deal with German Bundesliga giants Borussia Dortmund, that ran until the end of 22/23 football season just gone.

Their sporting exploits in Germany didn’t end there, however. That same summer, Coinbase extended their sponsorship of Berlin International Gaming (BIG).

Binance have been slightly more exuberant with their sports partnerships… their current and previous partnerships include:

• Africa Cup Of Nations (AFCON) 2021

• Lazio Football Club front of shirt sponsor

• Porto football club and Argentina national team’s fan token provider

• Exclusive partnerships with Cristiano Ronaldo

• Partnered with the Brazil Football Confederation

• Provider or F1 team Alpine’s fan token, and official partner

The suit will probably not stop Binance from signing more sponsorship deals in the future, but it will likely stop them from sealing deals in the USA.

📖 Deep dive into the filings

Various cryptoassets across the two suits were named unregistered securities.

From a sports perspective, the most important thing to note is that CHZ, the native token of the Chiliz blockchain, used by Socios, and FLOW, the native token of the FLOW blockchain are both named.

Let’s start with Chiliz.

In section 217. of the case, the SEC alleged that CHZ can reasonably be assumed a security because of secondary trading on an exchange; the one in question being Coinbase, means CHZ holders reasonably view CHZ as an investment in which they expect profits.

This in isolation I don’t think is ‘subject’ to interpretation and why the SEC’s case for a lot of these assets being securities is fairly weak.

In section 222. the SEC reference the CHZ whitepaper, and that there is evidence of ‘mutuality of interest’ between promoter and investor.

In sections 224, 225, and 226, the SEC say that CHZ has a primary function, which is to allow users to buy ‘Fan Tokens’ on Socios. Confusing I know, but CHZ is a token on Ethereum, even though Chiliz themselves have their own blockchain. And, to buy a fan token, you have to use CHZ, which is a token on Ethereum.

The SEC, are essentially alleging that fan tokens themselves fuel the demand of CHZ, but only because you have to use CHZ to buy the fan tokens.

Binance for example, have shown that this functionality doesn’t need to happen and that sports brands if they wish can just launch a fan token direct to exchanges.

The SEC also has an issue with burning CHZ tokens, which constrains the supply of tokens, which would lead investors to reasonably view a potential for profit (229).

The securities conversation, I think is on a spectrum but still likely the weakest part of the suit against Coinbase.

But I do think that the way Socios have constructed the product and from a user flow perspective does raise questions around the necessity of the CHZ token, in order to facilitate the purchase of fan tokens. As Binance have shown, they can be listed directly to an exchange and bought with fiat.

Now moving on to FLOW, where the likes of FanCraze, NBA Top Shot and NFL ALL DAY are built on.

The SEC allege that, although parent company Dapper Labs filed for exemption from SEC registry, they still think FLOW is a security.

A reminder that there is also an ongoing suit about whether NBA Top Shots, built on FLOW, are securities. Very confusing, I know.

A lot of the points raised around FLOW are contextual, but 243. and 244. allege, or insinuate that there could have been a reasonable expectation of profits and that the ‘low-inflation’ nature of FLOW, would ensure existing investors aren’t diluted.

🧠Concluding thoughts:

This has been a long newsletter, so I’ll try and stay succinct with my final thoughts:

• Just because a token or project has been alleged to be a security doesn’t mean it is one, and it doesn’t mean they’re not legitimately good projects.

• Conversely, if a project is cleared of being a security, it also doesn’t mean it’s a legitimate, good project!

• Coinbase will fight this very hard. They’ve already announced they won’t be delisting the named assets, and are welcoming a day in court against the SEC.

• This will get messy for Binance (in my opinion) but it won’t stop them from spending their marketing budget on sports properties outside the US.

• This is a watershed moment for crypto, but it’s overall positive whichever way it shakes out if you look at the regulatory clarity that is beginning to form in other parts of the world.

There are many polarising viewpoints on regulations regarding crypto but we definitely need better frameworks. Particularly in the US. I agree with Maya below on a few things being true:

From a sports lens, this regulatory clarity needs to be robust and happen quickly.

In last week’s newsletter, I mentioned how one of my queries on the EA Games x Nike NFT collaboration was regarding legal. How do you comply globally when using such nascent technology that has very few regulatory frameworks?

We need this quickly so that brands and sports organisations can operate in a way that doesn’t engulf them in legal fees and headaches, and so that consumers are protected.

💡 Sporting Crypto Spotlight

Brought to you by SEG3: Returning to London June 28/29

Did I say SEC? I meant… SEG3 

In an ever-changing landscape, keep up to date with the latest developments and trends within web3 and digital innovation at SEG3 London on June 28 & 29 alongside the likes of…

I’ll be speaking and early Bird tickets end this week; register now!

More Sports & Web3 Stories

• PUMA, LaMelo Ball, and Gutter Cat Gang Collaborate for Limited-Edition Hoops NFT (Read more here)

• Alts by Adidas is launching ‘Chapter 2’ of their latest NFT project (Read more here)

• Nike’s RTFKT Signs With CAA (Read more here)

• LinksDAO were presented as an example of the benefits of web3 in testimony by Polygon President Ryan Watt (Read more here)

• Karate Combat teams with Symphony to develop the league's first DAO app (Read more here)

• Ex-NFL team owner Reggie Fowler gets 6 years for crypto ‘shadow banking’ (Read more here)

General ‘Stuff’ that Could Impact You

• Ryan Watt, President of Polygon Labs testified at the innovation, data and commerce subcommittee at a congressional heading (Read more here)

• U.S. SEC Enforcement Could Boost Europe's Crypto Chances, Officials Say (Read more here)

• Louis Vuitton Brings Its Iconic Trunks Into the World of Web3 (Read more here)

• Twitch Co-Founder's Fractal Launches Tools to Help Devs Build NFT Games (Read more here)

• Apple & Disney bring immersive sports & movies to Vision Pro VR/AR headset (Read more here)

• GameStop NFT back in the spotlight after a partnership with Illuvium (Read more here)

Thanks for reading the latest edition of the Sporting Crypto newsletter. I’m happy to see so many people enjoying and sharing it with their networks.

If you enjoyed this, please tell your friends who might be interested - and share it on social!

Disclaimers

This newsletter is for informational purposes only and is not financial, business or legal advice.These are my thoughts & opinions and do not represent the opinions of any other person, business, entity or sponsor. Any companies or projects mentioned are for illustrative purposes unless specified.

The contents of this newsletter should not be used in any public or private domain without the express permission of the author.

The contents of this newsletter should not be used for any commercial activity, for example - research report, consultancy activity, or paywalled article without the express permission of the author.

Please note, the services and products advertised by our sponsors (by use of terminology such as but not limited to; supported by, sponsored by or brought to you by) in this newsletter carry inherent risks and should not be regarded as completely safe or risk-free. These services and products are provided by third-party entities, and we do not control, endorse, or guarantee the accuracy, efficacy, or safety of their offerings.

It's crucial to provide our readers with clear information regarding the inherent nature of services and products that might be covered in this newsletter, including those advertised by our sponsors from time to time. When you buy cryptoassets (including NFTs) your capital is at risk. Risks associated with cryptoassets include price volatility, loss of capital (the value of your cryptoassets could drop to zero), complexity, lack of regulation and lack of protection. Most service providers operating in the cryptoasset-industry do not currently operate in a regulated industry. Therefore, please be aware that when you buy cryptoassets, you are not protected under financial compensation schemes and protections typically afforded to investors when dealing with entities that are regulated and authorised to operate as financial services firms.