SEC's Coinbase Lawsuit Heralds Deepening Crypto Crackdown

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 by text message.

Coins Covered

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 U.S. Supreme Court decision defining investment contracts.

In its complaint, the SEC said that numerous tokens offered on Coinbase were securities, including SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO.

“One thing that stands out for me is the number of prominent tokens the complaint alleges to be securities,” said Philip Moustakis, a former attorney in the SEC’s enforcement division who is now a partner at Seward & Kissel. “Each of those tokens have stakeholders who will surely want to be heard on the subject.”

The question of whether certain tokens are securities has hung over the crypto industry for years. In 2020, the SEC sued Ripple Labs Inc., contending that its XRP token is a security and subject to SEC regulation. A ruling in the case is expected this year.

Staking

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.

The case is U.S. Securities & Exchange Commission v. Coinbase Inc. et al, 1:23-cv-04738, U.S. District Court for the Southern District of New York (Manhattan).

–With assistance from David Westin, David Pan, Vildana Hajric, Emily Nicolle and Lydia Beyoud.

(Image: Bloomberg)