Coinbase Global faces suit for alleged illegal exchanges
SEC says America's largest cryptocurrency dealer allowed trade of unregistered security tokens
The Securities and Exchange Commission widened its sweeping crackdown on cryptocurrency by accusing Coinbase Global of running an illegal exchange, a move that could make it harder for the industry to operate and for U.S. citizens to trade.
In a 101-page lawsuit filed Tuesday in federal court in New York, the SEC alleged that Coinbase for years evaded its rules by letting users trade numerous crypto tokens that were actually unregistered securities. Just a day earlier, the regulator sued rival Binance alleging a slew of violations.
The SEC moved against Coinbase, the biggest U.S. crypto exchange, after Chair Gary Gensler repeatedly argued for years that most tokens are subject to his agency's oversight and that swaths of the industry have been breaking the law. At the same time, U.S. regulators have been warning banks to steer clear of crypto because of potential risks to the financial system, making it harder for U.S. citizens to invest.
The SEC's lawsuit Tuesday stands out because of Coinbase's high profile in the U.S. and its status as a publicly traded company.
Coinbase shares tumbled as much as 20% in New York trading.
The case against Coinbase, coupled with Monday's case against Binance, forms a one-two punch against the industry. The SEC alleged Binance, the world's largest crypto platform, and its chief executive, Changpeng Zhao, mishandled customer funds, misled investors and regulators and broke securities rules.
The SEC didn't accuse Coinbase Chief Executive Officer Brian Armstrong of wrongdoing in its complaint. The firm was founded in 2012.
“The SEC under Gensler is dead set on enforcing rules that, if followed, would kill off almost all of crypto,” Omid Malekan, adjunct professor at Columbia Business School who has consulted on crypto.
Although Binance is bigger globally, Coinbase is the largest U.S. crypto exchange, with more than 150 different tokens that trade. Paul Grewal, the company's top lawyer, has previously said that those tokens aren't securities.
“The SEC's reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America's economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” he said in a statement on Tuesday.
Wall Street's main regulator is seeking an order that would require Coinbase to comply with securities laws and give up what the agency says were ill-gotten gains.
The regulator also alleged that Coinbase acted as an exchange, broker-dealer and clearinghouse all without registering with the SEC for any of those roles.
“This back-to-back, double whammy of actions by the SEC against Binance and Coinbase confirm that U.S. regulators believe strongly that these entities have for years ignored the securities laws,” Ashok Ayyar, counsel at Ashbury Legal, said.
A virtual currency may fall under the SEC's remit if investors buy it to fund a company or project with the intention of profiting from those efforts. That determination is based on a 1946 Supreme Court decision defining investment contracts. The SEC also accused Coinbase of breaking the agency's rules with its “staking” service. That product offers customers a return in exchange for providing their tokens to be used to facilitate transactions on a blockchain.