SEC sues Coinbase over exchange practices, alleges that it is an unregistered broker

In a significant development within the cryptocurrency industry, the US Securities and Exchange Commission (SEC) has filed a lawsuit against Coinbase, the largest cryptocurrency exchange globally. The lawsuit alleges that Coinbase has been operating as an unregistered broker and exchange, intensifying the regulatory scrutiny surrounding the company’s activities in recent times. The lawsuit was filed by the SEC in the US District Court for the Southern District of New York.

This development hardly comes as a surprise, especially since it comes after multiple indications that the crypto exchange was at risk of being sued by the US agency – including a warning in March. The SEC alleged that the company violated rules that required it to register as an exchange and be overseen by the federal agency. Furthermore, it demanded that Coinbase be “permanently restrained and enjoined” from continuing to violate the rules.

This legal action comes only a day after the SEC filed similar charges against Binance and its founder, Changpeng Zhao. For its part, Binance replied that it was “disappointed” with the SEC’s action and said it would “vigorously” defend its platform. Similar to the complaint against Binance, the SEC identified 13 assets listed on Coinbase as crypto asset securities. In the case of Coinbase, the crypto asset securities include Solana’s SOL token, Cardano’s token and Protocol Labs’ Filecoin token. Since Coinbase made those tokens available for trading and the SEC alleges they are securities, it was required to register as an exchange, brokerage and clearing agency, the SEC noted.

For those who are unaware, crypto asset securities are a type of security that is based on a cryptocurrency or other digital asset. If a crypto asset is treated as a security, it will only be able to be traded on a national securities exchange. The shares of Coinbase – which declined from commenting on the matter – took a tumble since the development was made public. Its shares fell by 15% in premarket trading on Tuesday, adding to the slump of 9% (which occurred after the SEC locked horns with another major crypto exchange Binance).

The lawsuit against Coinbase serves as a stark reminder of the potential risks associated with unregulated cryptocurrency exchanges. Without proper regulatory supervision, investors may be exposed to fraudulent activities, market manipulation, and inadequate security measures. The trade of securities is strictly regulated under US law, and the SEC argues that crypto tokens that Coinbase trades are fundamentally securities. By pursuing legal action against unregistered exchanges, the SEC aims to safeguard investors from potential risks associated with unregulated platforms. This focus on protecting retail investors aligns with broader efforts to create a secure and transparent environment for participants in the cryptocurrency market.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions. In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections.” SEC chair Gary Gensler said in a statement.

The statement went on to elaborate that since 2019, Coinbase engaging in an unregistered securities offering through its staking-as-a-service program, which allowed customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts, while the crypto exchange itself made billions by providing a platform for the buying and selling of crypto asset securities in an unlawful and discreet manner. Furthermore, Coinbase acted as a depository for the securities and served as an intermediary in settling transactions in crypto asset securities by Coinbase customers, the SEC notes.

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