Coinbase blasts SEC over insider trading case
Coinbase signage in New York’s Times Square during the company’s initial public offering on the Nasdaq on April 14, 2021.
Robert Nickelsberg | Getty Images
Coinbase pushed back against claims by the Securities and Exchange Commission that it offers unregistered securities, following fraud allegations against a former employee of the company.
A former Coinbase product manager was charged Thursday, along with two other people, with wire fraud in connection with an insider trading scheme involving cryptocurrencies. The case is the first of its kind.
US prosecutors accused the individuals of planning to profit from the listing of new tokens on the Coinbase platform before they were publicly announced.
In a separate complaint filed Thursday, the SEC said nine of the 25 tokens allegedly traded in the scheme were securities.
Coinbase̵[ads1]7;s legal director, Paul Grewal, denied the allegations Thursday in a blog post titled “Coinbase does not list securities. End of story.”
“Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform,” Grewal said in the blog post. “None of these assets are securities.”
“Coinbase has a rigorous process to analyze and evaluate each digital asset before it is made available on our exchange – a process that the SEC itself has reviewed.”
Whether some cryptocurrencies should be considered securities is a contentious issue that has confused both regulators and crypto firms.
Ripple, a San Francisco-based blockchain firm, is currently fighting a lawsuit from the SEC that claims XRP, a cryptocurrency it is closely associated with, should be treated as a security.
It goes back to a notable Supreme Court case known as the Howey Test, which considers an asset a security if it meets certain criteria. According to the SEC, a security is defined as “an investment of money, in a common enterprise, with a reasonable expectation of profit from the efforts of others.”
The SEC’s position is significant as it means Coinbase could be forced to classify some of the cryptocurrencies it offers as regulated financial instruments.
The process of listing securities, for example shares in a company, involves strict requirements for publication and registration. Cryptocurrencies, on the other hand, are unregulated and therefore do not come with the same level of scrutiny.
Coinbase has been known to be more conservative with its token listing framework than some other exchanges. Both Binance and FTX offer more than 300 coins, for example, while Coinbase lists just over 200, according to CoinGecko data.
Nonetheless, the SEC believes the company is hosting unregulated securities on its platform, a claim Coinbase denies.
Caroline Pham, commissioner of the Commodity Futures Trading Commission, also weighed in on the issue Thursday, calling the SEC’s securities fraud charges a “striking example of ‘regulation by enforcement’.” The CFTC oversees foreign exchange trading.
“The SEC’s allegations could have broad implications beyond this single case, and underscore how critical and urgent it is for regulators to work together,” Pham said in a statement. “Regulatory clarity comes from being out in the open, not in the dark.”
Coinbase’s Grewal agreed with Pham’s assessment.
“Instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these kinds of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that aren’t securities,” he said.
