SEC Files Lawsuit Against Coinbase, Intensifying Crypto Crackdown

Coinbase, a prominent cryptocurrency platform, is facing a lawsuit from the U.S. Securities and Exchange Commission (SEC), marking the second legal action against a major crypto exchange in as many days. The SEC’s move against Binance, the world’s largest cryptocurrency exchange, and its CEO Changpeng Zhao, accuses them of operating deceitfully. If successful, these lawsuits could have a transformative impact on the crypto market, establishing the SEC’s authority over an industry that has largely operated outside regulatory oversight.

Kevin O’Brien, a former federal prosecutor and current partner at Ford O’Brien Landy, noted that while the two cases differ, they align in their objective of bringing cryptocurrencies under the purview of federal securities laws. This represents an increasingly aggressive campaign by the SEC. O’Brien emphasized that these cases mark a significant step as the SEC has not previously targeted such major players in the crypto space. Success for the SEC in either case would result in a transformative shift for the cryptocurrency industry.

The SEC’s complaint against Coinbase, filed in Manhattan federal court, alleges that since 2019, the platform has profited billions of dollars by acting as a middleman in crypto transactions while evading disclosure requirements designed to protect investors. According to the SEC, Coinbase facilitated the trading of at least 13 crypto assets that qualify as securities and should have been registered, including tokens like Solana, Cardano, and Polygon.

In response to the lawsuit, Coinbase experienced a net outflow of approximately $1.28 billion from customers, according to initial estimates from data firm Nansen. The share price of Coinbase’s parent company, Coinbase Global Inc (COIN.O), dropped by 12.1% to $51.61, with a maximum decline of 20.9% earlier in the day. However, shares remain up by 46% for the year.

Paul Grewal, Coinbase’s general counsel, issued a statement assuring that the company will continue its normal operations and remains committed to compliance. Meanwhile, Ed Moya, senior market analyst at Oanda, suggested that the SEC’s actions resemble a game of “Whac-A-Mole” with crypto exchanges. Moya also pointed out that the SEC’s scrutiny of various tokens and blockchain protocols is likely just the beginning of a wider crackdown.

Interestingly, bitcoin, the leading cryptocurrency, experienced a paradoxical benefit from the regulatory crackdown. After an initial dip to a three-month low of $25,350 following the Binance lawsuit, bitcoin rebounded by more than $2,000, surpassing the previous day’s high. As of 0410 GMT, it was trading just below $27,000.

The SEC’s Chair, Gary Gensler, has consistently held the view that tokens should be classified as securities. He has steadily exerted the SEC’s authority over the crypto market, focusing initially on token sales and interest-bearing crypto products. Recently, the SEC has also targeted unregistered crypto broker-dealers, exchange trading, and clearing activities.

While a few crypto companies have obtained licenses as alternative system trading systems, which are used by brokers to trade listed securities, no crypto platform operates as a full-fledged stock exchange. This year, the SEC has also sued Beaxy Digital and Bittrex Global for failing to register as an exchange, clearinghouse, and broker.

Cryptocurrency companies argue against tokens meeting the definition of securities, citing ambiguous SEC rules and the regulator’s overreach in attempting to regulate them. Nevertheless, many companies have enhanced their compliance measures, shelved products, and expanded operations beyond the United States in response to the crackdown.

Kristin Smith, CEO of the trade group Blockchain Association, rejected Gensler’s efforts to oversee the industry and expressed confidence that the courts will eventually prove him wrong.

Established in 2012, Coinbase serves over 108 million customers and held $130 billion of customer crypto assets and funds on its balance sheet as of March. Transaction-related activities accounted for 75% of Coinbase’s $3.15 billion in net revenue last year.

The SEC’s lawsuit against Coinbase seeks civil fines, the recovery of illicit gains, and injunctive relief. In the case of Binance, the company has vowed to vigorously defend itself against the lawsuit, which it considers a reflection of the SEC’s refusal to provide clarity to the crypto industry. Following the lawsuit against Binance, approximately $790 million was withdrawn by customers from the exchange and its U.S. affiliate.

On Tuesday, the SEC moved to freeze assets belonging to Binance’s U.S. affiliate, Binance.US. Binance’s holding company is based in the Cayman Islands.

Joshua Chu, group chief risk officer at blockchain technology firms XBE, Coinllectibles, and Marvion, stressed that recent regulatory actions aim to ensure compliance with securities laws and protect investors. He believes that these events will lead to a more stable and trustworthy industry, potentially attracting more institutional investors and fostering mainstream adoption.