A day after Binance was charged with 13 securities law violations, the US Securities and Exchange Commission (SEC) has set its sights on Coinbase.
On Tuesday, June 6, the SEC announced it was suing Coinbase for allegedly operating as an unregistered stockbroker, unregistered exchange, and unregistered clearing house. Furthermore, the SEC alleges that Coinbase’s staking program violates the Securities Act.
Today we have Coinbase, Inc. indicted for operating its crypto-asset trading platform as an unregistered national stock exchange, broker and clearing house and for failing to register the offering and sale of its crypto-asset staking-as-a-service program.https : http://t.co/XPG2gDkxtV pic.twitter.com/hCdVMw8B2v
— U.S. Securities and Exchange Commission (@SECGov) June 6, 2023
The lawsuit
The SEC’s complaint, which dates back to at least 2019, alleges that Coinbase generated billions of dollars by unlawfully facilitating the trading of crypto assets. According to the SEC, Coinbase operates as an exchange, brokerage and clearing agency without obtaining the necessary registrations from the Commission.
These unregistered services provided by Coinbase include acting as a marketplace, bringing together buyers and sellers of securities, executing securities transactions on behalf of clients, and providing facilities for data matching and settlement of crypto asset securities transactions.
The SEC argues that Coinbase’s failure to register has deprived investors of crucial safeguards, such as regulatory oversight, proper administration and protection against conflicts of interest. The SEC’s complaint also extends liability to Coinbase’s holding company, Coinbase Global Inc. (CGI), as a control agent with respect to certain violations.
SEC Chairman Gary Gensler emphasized the importance of Coinbase’s alleged non-compliance, stating, “Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC.” Gensler emphasized the importance of complying with legal standards in protecting the investing public.
“While Coinbase’s calculated decisions have made it possible to make billions, it has come at the expense of investors.”
Gurbir S. Grewal, Director, SEC Enforcement Division
Gurbir S. Grewal, director of the SEC’s enforcement division, echoed Gensler’s sentiments, noting that Coinbase was fully aware of the applicability of federal securities laws to its operations, but deliberately chose not to comply. Grewal stressed that Coinbase’s actions may have harmed investors and emphasized the need to hold the company accountable.
“While Coinbase’s calculated decisions have allowed it to make billions, it has come at the expense of investors by depriving them of the protections they are entitled to. Today’s action is to hold Coinbase accountable for its choices,” he explained.
The SEC’s suit, filed in U.S. District Court for the Southern District of New York, seeks injunctive relief, remission of ill-gotten gains with interest, fines and other equitable remedies.
28 days to prove cause
After the SEC’s indictment, another blow came to the market. Together, 10 US states (Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin) have issued a Show Cause Order and a cease and desist order to Coinbase.
Led by the Alabama Securities and Exchange Commission (ASEC), the order gives Coinbase 28 days to “show why” they should not stop selling unregistered securities in the state.
“The ASC is committed to protecting consumers and investors in Alabama, including those who choose to invest in the decentralized finance space,” ASC Executive Director Amanda Senn explained in a press release. “This action is another step to ensure that investors in crypto asset products receive the same protections under our laws and are fully aware of the risks associated with these investments.”
Coinbase is asking for regulatory framework (again).
The SEC’s lawsuit against Coinbase is just the most recent and prominent example of the legal battle between the two organizations, with the latter trying to get clear guidance from the SEC regarding securities laws and registration requirements for the past year.
In a July 2022 regulatory petition, Coinbase formally requested that the Commission “propose and adopt rules for the regulation of securities offered and traded through digitally native methods, including possible rules to identify which digital assets are securities.” ”
Coinbase, along with other crypto exchanges, believes that the regulatory body is not acting in good faith and moves the regulatory target posts every time the exchange meets them to better comply with the law. This behavior has not gone unnoticed by the US justice system; on June 7, the U.S. Court of Appeals for the Third Circuit stepped in and issued an ultimatum to the SEC: they have seven days to respond to Coinbase’s July 2022 petition.
Earlier tonight, the Third Circuit issued a short order for Coinbase’s mandamus action today. The court this morning took note of the SEC’s lawsuit against us and asked the SEC if that means the SEC has decided to deny our pending regulatory petition. The SEC has 7 days to respond. pic.twitter.com/8QXXoHJ07Z
— paulgrewal.eth (@iampaulgrewal) June 7, 2023
In his June 6 DC speech, Coinbase Chief Legal Officer Paul Grewal reiterated the exchange’s (and the wider industry’s) call for a clear regulatory framework for digital assets and the exchanges that host them. He called on Congress to pass a bill – the Digital Asset Market Structure Discussion Draft – which he referred to as “a strong step forward in providing overdue regulatory clarity.”
The proposed bill outlines criteria for classifying digital assets as securities or commodities, thereby determining the regulatory body that oversees them. It also addresses the crucial definition of when a network can be considered “decentralized,” a factor that determines whether an issuer falls under the jurisdiction of the SEC or the Commodity Futures Trading Commission.
“The solution is legislation that allows fair rules for the road to be transparently developed and applied equally, not lawsuits,” Grewal said. “Despite today’s complaint, we will continue to operate as normal.”
This was a breaking news story and has been updated.