In a major blow to the cryptocurrency industry, the US Securities and Exchange Commission (SEC) has launched a lawsuit against Coinbase, the largest crypto asset trading platform in the United States. The regulatory agency claims that Coinbase operated as an unregistered national securities exchange, broker, and clearing agency, which is in violation of federal securities laws.
The SEC argues that traditional securities markets separate brokers, exchanges, and clearing agencies, but Coinbase “intertwined” these functions, thereby denying investors the necessary protections. These protections include SEC inspections, safeguards against conflicts of interest, and recordkeeping requirements. The agency further alleges that Coinbase does not qualify for any exemptions from registration for any of these functions. According to the SEC, Coinbase has unlawfully profited in the billions of dollars from transaction fees by facilitating the buying and selling of crypto asset securities since at least 2019.
Gurbir S. Grewal, the director of the SEC’s Division of Enforcement, emphasized the importance of following regulations, stating, “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.” He criticized Coinbase for knowingly disregarding the applicability of federal securities laws to its business activities, prioritizing its own profits over investor protection.
This recent complaint from the SEC follows an investigation into Coinbase’s potential illegal sale of unregistered securities, which was reported last July. Interestingly, the SEC’s action coincides with Coinbase’s chief legal officer, Paul Grewal, testifying before a congressional committee regarding a new draft bill aimed at implementing cryptocurrency regulations.
In response to the allegations, Coinbase stated that it had received a notice from the SEC in March about potential securities law violations but was not provided with sufficient details. The company claimed to have submitted multiple proposals to the SEC for registration, all of which were left unanswered by the agency.
The SEC’s lawsuit against Coinbase comes on the heels of its filing of 13 charges against Binance and its CEO Changpeng Zhao earlier this week. The regulatory agency accused Binance of circumventing compliance measures and deceiving investors and regulators. Additionally, the SEC has been involved in the government’s case against Sam Bankman-Fried, the founder and former CEO of FTX.
Coinbase is also facing regulatory actions at the state level, as a task force comprising regulators from ten states has issued a Show Cause Order against the exchange. The Alabama Securities Commission, one of the participating states, accused Coinbase of violating securities laws by offering its staking rewards program accounts to Alabama residents without proper registration. Coinbase has been given 28 days to provide a response as to why it should not be ordered to cease and desist from selling unregistered securities in the state of Alabama.