SEC Sues Coinbase, Accuses Crypto Platform of Violating Market Rules

In an intensified effort to end what authorities see as the era of lawlessness in the cryptocurrency market, the Securities and Exchange Commission on Tuesday sued Coinbase, the largest cryptocurrency trading platform in the United States, claiming the company broke the law by failing to register. as a broker.

The SEC, the country’s top securities regulator, filed the lawsuit a day after it accused Binance, the world’s largest cryptocurrency trading exchange, of mishandling customer funds and lying to US regulators and investors about its operations.

With these federal actions against major crypto companies, along with other state-level lawsuits, regulators have sought to reshape the crypto sector by treating digital asset exchanges like more traditional financial firms, while pushing out individuals and companies they see as bad actors.

In its filing on Tuesday, the SEC detailed the ways Coinbase’s executives had shown they knew how the marketing and sale of digital assets should be governed under US laws, even while not following them.

“Coinbase has elevated its interest in increasing profits over the interests of investors, and over compliance with the laws and regulations that govern the securities markets and were created to protect investors and the US capital markets,” the filing said.

Coinbase went public in April 2021, an event seen as a milestone in crypto’s march into the mainstream. The company handled $830 billion worth of trades last year, with nearly nine million users making at least one trade per month.

The SEC said Coinbase had made billions by facilitating the sale of cryptoassets, but deprived investors of significant protections. Its complaint, filed in federal court in Manhattan, alleges that the company operated as an unregistered exchange, even though it told investors by going public that regulators may consider some of the products traded on its platform to be securities.

Coinbase has argued that the business model received tacit approval from the SEC when the agency approved the initial public offering. The company has said it is willing to cooperate with the SEC, but does not agree with their position that all digital assets offered on the trading platform must be registered securities, which require stricter oversight.

The action is consistent with the SEC’s longstanding view that most crypto products are no different from stocks, bonds and other securities. This means that the firms that operate as exchanges and offer a platform for the trading and sale of crypto products must be registered as any exchange or brokerage that facilitates share or bond trading.

“You simply cannot ignore the rules because you don’t like them or because you prefer different ones: The consequences for investors are far too great,” Gurbir S. Grewal, director of the SEC’s enforcement division, said in a statement.

Crypto industry leaders, who have delighted in challenging the rules and operating outside the heavily regulated confines of the mainstream financial industry, have often argued that digital assets are different and that many of the rules for stocks should not apply.

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry harms America’s economic competitiveness,” Coinbase’s chief legal officer, Paul Grewal, said in a statement on the matter.

“The solution is legislation that allows fair rules of the road to be developed transparently and applied in the same way, not litigation,” added Grewal, who is not related to the SEC enforcement officer.

“The message here is that regulatory clarity already exists when it comes to exchanges and broker-dealers,” said John Reed Stark, a former SEC enforcement attorney and regulatory consultant.

In addition to Coinbase’s legal troubles, securities regulators in 10 states, including Alabama, California, Illinois and New Jersey, filed their own actions on Tuesday to prevent the company from selling unregistered securities to investors in their states.

State regulators said Coinbase must first register to offer these products in their states. Some states, such as New Jersey, fined the company.

The SEC lawsuit and actions by state regulators against Coinbase touched on a crucial question that many in the crypto industry have said Congress needs to address: whether digital assets are securities or something else entirely.

The SEC has said that the test for determining whether a crypto product should be treated as a security is derived from a 1946 Supreme Court case that led to what is known as the Howey test. The SEC chairman, Gary Gensler, has often said that this standard is clear and that no new laws are necessary to determine whether a digital asset is a security. However, the industry has begged to differ.

The SEC complaint took issue with Coinbase’s claims that it fully complied with applicable securities laws before offering new digital products for trading, dismissing them as “lip service.”

According to the 101-page complaint, Coinbase has for years made available for trading cryptoassets that are investment contracts under Howey test and well-established principles of the federal securities laws.”

The suit, long anticipated by Coinbase, comes as its executives and others in the crypto industry hope to change the narrative about digital assets. Mr. Grewal of Coinbase testified before a House committee on Tuesday about a draft bill regulating crypto. Coinbase has said it welcomes regulation and wants to cooperate with the SEC

The SEC lawsuit is the latest enforcement action in a multi-year crackdown on the crypto market by the regulator, which has gained momentum since the collapse of the FTX cryptocurrency exchange in November and criminal charges against its founder, Sam Bankman-Fried.

Notably, the lawsuit against Coinbase did not include an allegation of fraud, like the complaint against Binance, or a request for a preliminary injunction against the company. On Monday, the SEC also sued Binance’s founder and CEO, Changpeng Zhao. On Tuesday, it did not similarly sue Coinbase’s CEO, Brian Armstrong.

Coinbase, unlike Binance, does not issue its own crypto tokens, and the company has claimed that its status as a publicly traded company ensured that it followed strict rules for its operations.

The company petitioned the SEC for new rules last summer and even sued the agency for failing to act on the request in April.

The storm of legal action against Coinbase, and the crackdown on the crypto industry in general, has weighed on the company’s share price. Shares in Coinbase have fallen about 20 percent in the past two days.