Los Angeles Times

Coinbase faces SEC investigat­ion of crypto assets

Regulators aim to see if some offerings should have been listed as securities.

- By Allyson Versprille and Lydia Beyoud Versprille and Beyoud write for Bloomberg. Writers Alex Nguyen, Matt Robinson and Beth Williams of Bloomberg contribute­d to this report.

Coinbase is facing a U.S. investigat­ion into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter.

The U.S. Securities and Exchange Commission’s scrutiny of Coinbase has increased since the platform expanded the number of tokens in which it offers trading, said two of the people, who asked not to be identified because the inquiry hasn’t been disclosed publicly. The investigat­ion by the SEC’s enforcemen­t unit predates the agency’s inquiry into an alleged insider trading scheme that led the regulator last week to sue a former Coinbase manager and two other people.

“We are confident that

our rigorous diligence process — a process the SEC has already reviewed — keeps securities off our platform, and we look forward to engaging with the SEC on the matter,” Paul Grewal, the company’s chief legal officer, said on Twitter. The SEC declined to comment.

The drumbeat in Washington for regulators to do more to oversee crypto has

grown louder as digital currencies have tumbled from all-time highs, erasing hundreds of billions of dollars in market value. SEC Chair Gary Gensler has homed in on trading platforms and argued that they should do more to protect retail investors.

As the largest U.S. trading platform, Coinbase lets Americans trade more than 150 tokens. If those products were deemed securities, the firm could need to register as an exchange with the SEC. Coinbase shares fell $14.14 to $52.93 in New York for a oneday loss of 21%, leaving the stock down 79% this year.

Coinbase has repeatedly sparred with the agency over how it oversees the industry, and the firm last week called on the SEC to propose clearer rules. Meanwhile, after taking a relatively cautious approach for years, Coinbase has boosted its token offerings.

Tensions bubbled up further Thursday when the SEC accused one of the company’s former employees of violating its insider-trading rules by leaking informatio­n to help his brother and a friend buy tokens just before they were listed on the platform. Although the agency didn’t allege wrongdoing by Coinbase, the SEC said it had determined that nine of the dozens of digital tokens the men traded were securities — including seven the exchange says it lists.

Federal prosecutor­s in Manhattan also charged the three men with wire fraud conspiracy and wire fraud.

In response, Coinbase put out an entry on its blog titled: “Coinbase does not list securities. End of story.” Grewal pointed out that the Justice Department chose not to file securities fraud charges, despite reviewing the same facts as the SEC. He also said that before listing tokens, Coinbase analyzes whether an asset could be considered a security and “also considers regulatory compliance and informatio­n security aspects of the asset.”

Investigat­ions by the SEC’s enforcemen­t unit can lead to the regulator suing companies or individual­s.

Coinbase, which went public last year, previously acknowledg­ed that it has faced scrutiny from the regulator. In its first-quarter earnings report, the firm said it had “received investigat­ive subpoenas from the SEC for documents and informatio­n about certain customer programs, operations, and intended future products, including the company’s stablecoin and yield-generating products.”

To decide whether a digital asset is a security, the SEC applies a legal test, which comes from a 1946 U.S. Supreme Court decision. Under that framework, the agency considers a token generally to be under SEC purview when it involves investors kicking in money to fund a company with the intention of profiting from the efforts of the organizati­on’s leadership.

Gensler has long argued that many cryptocurr­encies come under the regulator’s jurisdicti­on and that firms offering them should register with his agency.

However, the SEC mostly hasn’t said specifical­ly which coins are securities, and exchanges decide whether to list an asset. Platform operators are seeking to avoid offering those deemed securities because doing so could trigger investor-protection rules, some of which crypto enthusiast­s say are incompatib­le with digital assets.

 ?? Andrew Harnik Associated Press ?? SEC CHAIR Gary Gensler has said that trading platforms should do more to protect retail investors.
Andrew Harnik Associated Press SEC CHAIR Gary Gensler has said that trading platforms should do more to protect retail investors.

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