The SEC Comes After Coinbase

The Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase on Monday, alleging that the cryptocurrency exchange operated as an unregistered securities exchange, broker, and clearing agency.

The SEC alleges that several tokens offered by Coinbase, including Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infinity (AXS), Chiliz (CHZ), Flow (FLOW), Internet Computer (ICP), Near (NEAR), Voyager Token (VGX), Dash (DASH) and Nexo (NEXO) qualify as securities.

The lawsuit further alleges that Coinbase has operated as an unregistered security broker since 2019, almost two years before its initial public offering in April 2021.

The SEC claims that Coinbase’s staking program includes five stackable crypto assets, making the staking program an investment contract and, therefore, a security. Coinbase was already fighting a staking battle with the SEC, claiming its staking products do not qualify as securities despite Kraken previously settling with the SEC and winding down its staking services in the United States.

Addressing the latest Coinbase lawsuit, SEC Chair Gary Gensler said the crypto exchange allegedly deprived its customers of critical protections that prevent fraud and manipulation, and avoided proper disclosure and safeguards against conflicts of interest. Gurbir Grewal, director of the SEC’s Division of Enforcement, said:

“As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them”

The SEC’s lawsuit against Coinbase comes just a day after the securities regulator sued Binance for violating securities law and comingling customers’ funds. While Binance was charged with 13 counts of violations under various securities laws, the allegations against Coinbase have puzzled many in the crypto industry, primarily because Coinbase is a publicly listed company.

The SEC’s reliance on an enforcement-only approach without clear rules for the digital asset industry is hurting America’s economic competitiveness. Paul Grewal, chief legal officer at Coinbase added:

“The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual”

Many in the crypto community questioned how Coinbase was allowed to go public in 2021 if it operated as an unregistered security broker.

The SEC’s lawsuit against Coinbase is a major development in the ongoing regulatory scrutiny of the cryptocurrency industry in the US, and is helping drive innovation offshore. The outcome of the lawsuit could have a significant impact on the future of centralized cryptocurrency exchanges in the United States.