In a significant development, the United States Securities and Exchange Commission (SEC) has charged Coinbase, the largest cryptocurrency trading platform in the country, with illegal operations, marking a broadening crackdown on the crypto industry. The regulatory agency accuses Coinbase of acting as a broker, exchange, and clearing agency for investments subject to SEC rules without proper registration, allowing the firm to evade oversight, including measures against conflicts of interest.
The SEC’s move comes just a day after the regulatory body filed a lawsuit against Binance, the world’s leading crypto trading platform, citing mishandling of customer funds, artificial inflation of trading volume, and attempts to circumvent US regulations.
Emphasizing the need for clear legislation, Coinbase’s chief legal officer, Paul Grewal, expressed that the rules governing the industry were not adequately defined. He stated, “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.”
This action against Coinbase follows legal actions taken by financial regulators from ten states, including California and Alabama, who alleged that the platform operated as an unregistered securities dealer. Gurbir S. Grewal, the director of the SEC’s division of enforcement, asserted that Coinbase was fully aware of the applicability of federal securities laws but deliberately chose not to comply with them. He added, “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great.”
Coinbase, founded in 2012, boasts over 100 million customers and handles billions of dollars’ worth of digital asset trading volumes daily, including prominent cryptocurrencies like Bitcoin. The company went public in 2021, reaching a market value close to $100 billion during the peak of the crypto frenzy. However, Coinbase’s shares have plummeted significantly since the decline in crypto values, leaving it with a current worth of less than $12 billion.
Following news of the lawsuit, Coinbase’s shares experienced a 12% decline, while Nansen, a platform tracking crypto flows, reported that customers withdrew nearly $1.3 billion from the platform. In March, Coinbase had warned about the potential legal action from the SEC, expressing disappointment and stating that it had made repeated efforts to collaborate with authorities for registration, but faced an absence of clear guidelines for crypto firms. The company had even contemplated relocating its operations outside the US to locations like London.
While the SEC’s enforcement action indicates an enforcement-only approach due to the absence of comprehensive rules for the digital asset industry, industry representatives argue that the evolving nature of laws governing the sector and ongoing discussions in Congress undermine the SEC’s case. The chief executive of the Blockchain Association, Kristin Smith, highlighted the need for clear regulatory frameworks and expressed confidence that the courts would vindicate Coinbase and challenge SEC Chairman Gary Gensler’s stance.
Coinciding with the SEC’s lawsuit against Coinbase, Paul Grewal was scheduled to testify in Washington regarding the formulation of laws governing certain types of digital assets. In his prepared remarks for the hearing, Grewal asserted that Coinbase diligently reviewed assets listed on its platform to assess whether they should be considered securities regulated by the SEC, noting that it rejected the “vast majority” of proposals. He concluded, “The SEC doesn’t make the law – it only makes accusations – and we’re confident the courts will prove Gensler wrong in due time.”
As the crypto industry faces heightened scrutiny and calls for regulatory clarity, the outcome of these legal battles and ongoing discussions in Congress will likely shape the future landscape of digital asset trading in the United States.