: Should you be worried if your crypto is in Binance.US or Coinbase?

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One of the first rounds in the clash between the Securities and Exchange Commission and Binance is giving the exchange’s users an uncomfortably close front row — and it might have them wondering if they should keep their funds or flee.

The answer boils down to the risk a person can stomach, experts say.

The SEC has alleged that Binance, the world’s largest cryptocurrency exchange, mishandled customer funds and acted as an unregistered securities exchange. Now the regulator is asking a federal judge to push a pause button that would freeze the assets tied to Binance.US, the company’s exchange for U.S. residents. It’s a legal bid to maintain the status quo while the litigation plays out, SEC lawyers said in court filings.

The asset freeze is “draconian and unduly burdensome,” Binance.US lawyers said, adding that the harm would fall on Binance.US customers while effectively putting the platform and related holding companies out of business.

The lawyers noted in court papers that customers’ crypto assets and fiat currency were secure.

Binance.US already said it will be pausing U.S. dollar deposits and recurring buy orders as of last Friday. Payment and banking partners are prepared to pause the avenues for people to pull dollars from the exchange as soon as Tuesday. The platform’s ability to accept deposits and process withdrawals “will be impacted,” it said on Twitter.

“Until we secure more stable banking partners, Binance.US will remain a crypto-only exchange – at least for a time,” Binance.US said in an announcement last week.

The SEC motion is in front of Washington D.C. District Court Judge Amy Berman Jackson.

The Binance lawsuit is part of the SEC’s recent one-two punch at the crypto industry. The SEC is also suing Coinbase
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alleging the publicly-traded company is also operating an unregistered securities exchange, brokerage and clearing agency.

While the judge decides how to rule on Binance.US assets, crypto investors may be nervous about how to be in control of their assets. Many crypto investors are young, just building their wealth and already seeing warning flags for cryptocurrency.

FTX was a high-profile exchange that devolved into bankruptcy proceedings last year. Its founder, Sam Bankman-Fried, is facing criminal charges and has pleaded not guilty. FTX is part of a scarred list of crypto lenders and brokerages in bankruptcy.

“It’s real easy to get into crypto,” said Mark Hays, senior policy analyst at Americans For Financial Reform, a coalition in support of tighter regulation in the budding space. “What people don’t realize, when they do that, because these exchanges are often either unregulated or poorly regulated right now – and in some cases are resisting compliance – they don’t have some to the same protections that ordinary investors do when it comes to their funds.”

Are customer assets safe at Coinbase and Binance?

Yes, according to the exchanges. It’s a point they’ve made in public statements and court papers.

“Customer assets are safe and secure at Coinbase,” a spokesperson told MarketWatch on Tuesday.

At Binance.US, “customer assets are secure, appropriately segregated, and available to customers,” lawyers said in Monday court filings.

Coinbase and Binance.US said they have 1:1 reserves for customer assets. Coinbase keeps its client cash in in Federal Deposit Insurance Corporation-insured banks, which protects $250,000 per depositor, per account, according to the company’s website. Larger cash balances go to money market mutual funds, which are conservative and highly liquid, Coinbase said.

Coinbase CEO Brian Armstrong has said the lawsuit against his company is “very different from others out there” because it’s just focused on the definitions of what counts as a security.

Binance.US said it has worked with custodians to make sure dollar deposits are held in accounts at FDIC-insured banks.

Others have misgivings. Hays emphasized he wasn’t giving investment advice, but people with money and assets on the exchanges “should think long and hard” on the question of safety.

The lawsuits aren’t singling out “bad apples” but are regulator reactions to “systemic” weak spots in the new world of crypto investing, he said.

Coverage from the Securities Investor Protection Corporation is a good example, he said. SIPC is a nonprofit organization created by federal law in 1970. While not a government agency, the organization steps in to restore missing investor assets when brokerage firm members fail.

SIPC coverage is up to $500,000 for securities and cash, though the coverage includes a $250,000 limit on cash. The coverage applies when firms liquidate and the coverage is not a protection against market fluctuations or bad investing advice.

Two things have to happen before coverage applies, explained SIPC President and CEO Josephine Wang. The customers have their money and assets with a member firm, the customer has to be owed “securities or related cash,” she said.

“Under the law creating SIPC, ‘security’ does not include unregistered investment contracts. Crypto assets generally would be viewed as investment contracts and unless registered with the SEC, they are not securities under the SIPC statute, and therefore, they cannot be customer property,” Wang said.

Binance is not a SIPC member, Wang said. Coinbase has two broker-dealers that are SIPC members, according to a person familiar with Coinbase. But the company isn’t currently permitted to use them for digital asset securities because it’s awaiting a green light from the Financial Industry Regulatory Authority (FINRA), the person said.

FINRA is a nonprofit organization overseen by the SEC that supervises brokerage firms.

What are alternatives?

If people are moving digital assets off Binance and Coinbase, where do they go next? The choices are exchanges, holding the crypto in a personal wallet and decentralized finance.

Binance and Coinbase, along with Crypto.com, are the “most reputable exchanges,” said attorney Blake Harris, who focuses on asset protection for clients.

“I’m not going to say that I think that it’s game over for Binance or Coinbase by any means,” he said. But speaking generally, Harris said if people wanted to store their money on exchanges, he wouldn’t necessarily do it all on one exchange.

Crypto.com did not immediately respond to a request for comment.

Another option is keeping the cryptocurrency in an offline wallet in what can be called “cold storage.”

One risk is losing or forgetting the codes, passwords and recovery phrases to re-access the wallet once the crypto is inside, said Hays. There’s the risk of misplacing it too, he said. Another risk is faulty design and coding glitches that block access, Hays added. Still, Harris said he likes the idea of cold storage – but with conditions.

“There’s a reason banks were invented. People themselves are not great at storing their own money,” Harris said. It could be a move for a tech-savvy investor with less than $10,000 in crypto, Harris said.

The more crypto an investor is holding themselves, “the more you become a target of lawsuits, the more you become a target to be robbed.”

Another option is decentralized finance, or DeFi, which is a peer-to-peer payment system that avoids intermediaries like banks or brokerages. However, there are cybersecurity risks and risks of getting money directed into investments and coins that a person might not want, Hays said.

Whichever route, Hays said “risk abounds in this space. It’s really just a question of what flavor of risk you are up for.”