On June 6, 2023, the United States Securities and Exchange Commission (SEC) sued New York-based cryptocurrency exchange Coinbase for offering unregistered securities. The SEC claimed that Coinbase has never registered as a broker, national securities exchange, or clearing agency, evading the disclosure scheme for securities markets. The lawsuit further alleged that Coinbase has operated as an unregistered security broker since 2019, almost two years before its initial public offering in April 2021.
According to the SEC, several tokens offered by the crypto exchange, 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 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. In contrast, Kraken previously settled with the SEC and wound down its staking services in the United States.
SEC Chair Gary Gensler said that Coinbase allegedly deprived its customers of critical protections that prevent fraud and manipulation, 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.”
Coinbase’s share price dropped 15% in pre-trading after the SEC announced its lawsuit on June 6.
The SEC’s lawsuit against Coinbase came 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.
Binance CEO Changpeng Zhao reacted to the Coinbase lawsuit by taking a dig at the SEC. He tweeted: “If you have to pick a fight with everyone, maybe you are the one at fault.”
Paul Grewal, chief legal officer at Coinbase, criticized the SEC’s reliance on an enforcement-only approach without clear rules for the digital asset industry. He stated that the solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. He added, “In the meantime, we’ll continue to operate our business as usual.”
Many people in the crypto community questioned how Coinbase was allowed to go public in 2021 if it operated as an unregistered security broker. Some speculated that the SEC suing Coinbase could cut some slack for Binance.
It remains to see how this lawsuit will affect the cryptocurrency industry and Coinbase’s reputation as a leading cryptocurrency exchange. The regulation of cryptocurrencies is a complex and evolving subject, and it is essential that the parties involved work towards clarity and transparency for the industry’s benefit.
