US lawsuit against Coinbase heralds deepening crypto crackdown

Washington – The United States Securities and Exchange Commission (SEC) widened its sweeping crackdown on crypto by

accusing Coinbase Global of running an illegal exchange,

a move that could make it harder for the industry to operate and for US citizens to trade.

In a 101-page lawsuit filed on Tuesday in federal court in New York, the SEC alleged that Coinbase for years evaded its rules by letting users trade numerous crypto tokens that were actually unregistered securities.

Just a day earlier,

the regulator sued rival Binance, alleging a slew of violations.

The SEC moved against Coinbase, the biggest US crypto exchange, after chairman Gary Gensler repeatedly argued that most tokens are subject to his agency’s oversight and that swathes of the industry have been breaking the law.

At the same time, US regulators warned banks to steer clear of crypto because of potential risks to the financial system, making it harder for US citizens to invest.

The SEC’s civil lawsuit stands out because of Coinbase’s high profile in the US, and its status as a publicly traded company. The stock fell 12 per cent to close at US$51.61 in New York trading on Tuesday.

The case against Coinbase, coupled with Monday’s against Binance, forms a one-two punch against the industry.

The SEC alleged Binance, the world’s largest crypto platform, and

its chief executive Zhao Changpeng,

mishandled customer funds, misled investors and regulators, and broke securities rules.

“The SEC under Gensler is dead set on enforcing rules that, if followed, would kill off almost all of crypto,” Professor Omid Malekan, an adjunct professor at Columbia Business School who has consulted on crypto, said in a text message.

Gensler crackdown

Mr Gensler said in an interview on Bloomberg Television that the SEC worked with 10 states to bring its complaint against Coinbase. He cast the agency’s efforts to clamp down on crypto as one of both investor protection and US market integrity.

“Why should the New York Stock Exchange or broker dealers we all know and respect be undermined by this other corner of the capital markets, which is sort of saying, thumbing their nose and saying, ‘Catch us if you can’?,” Mr Gensler told Bloomberg’s Mr David Westin.

‘Enforcement-only approach’

Coinbase was co-founded in 2012 by Mr Brian Armstrong, its chief executive officer. He was not accused of wrongdoing in the SEC’s complaint.

Although Binance is bigger globally, Coinbase is the largest US crypto exchange, with more than 150 different tokens that trade. Mr Paul Grewal, the company’s top lawyer, has previously said that those tokens are not 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.

Mr Ashok Ayyar, counsel at Ashbury Legal, said by text message: “This back-to-back, double whammy of actions by the SEC against Binance and Coinbase confirm that US regulators believe strongly that these entities have for years ignored the securities laws.”

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 US 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 Mr 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, contending that its XRP token is a security and subject to SEC regulation. A ruling in the case is expected in 2023.

Staking

The SEC also accused Coinbase of breaking the agency’s rules with its “staking” service.

In its staking rewards programme, which has about 3.5 million customers, Coinbase pools crypto assets and uses them to support activity on the blockchain network, in exchange for “rewards” it provides customers after taking a commission for itself. BLOOMBERG