The Securities and Exchange Commission filed a lawsuit against Coinbase on Tuesday, alleging that the largest cryptocurrency platform in the United States violated rules requiring it to register as an exchange and be regulated by the federal agency.
The case is the second against a prominent cryptocurrency exchange in two days, following enforcement action against Binance and its founder Changpeng Zhao by the regulator on Monday.
The Coinbase lawsuit, filed in federal court in Manhattan, is another significant step by the SEC and its chairman, Gary Gensler, to regulate the entire cryptocurrency industry, including its largest companies. The SEC has centred its strategy on using its enforcement division to subdue the industry and demonstrate why its regulations apply to crypto activities.
The SEC’s complaint against Coinbase differed significantly from the lawsuit it filed the day before against Binance. The SEC did not identify Coinbase CEO Brian Armstrong or accuse the company of mishandling customer funds. Monday, Binance and its U.S. subsidiary Binance.US stated they would defend themselves and that all user assets were safe.
In the absence of clear crypto regulations, Coinbase pushed back on Tuesday, accusing the SEC of adopting a “enforcement-only approach” to the crypto industry.
“Litigation is not the answer,” Paul Grewal, chief legal officer of Coinbase, said in a statement. “The solution is legislation that allows fair road rules to be developed transparently and uniformly,” he added. He stated, “In the interim, we will continue to conduct business as usual.”
Analyst at Berenberg Capital Markets, Mark Palmer, stated that Coinbase “is between a rock and a hard place.”
“Coinbase is now in a position where it must defend the majority of its operations in court, and its only option is to pivot, which is extremely challenging,” Palmer said. Coinbase generated over 80 percent of its 2022 revenue in the United States.
Coinbase was punished by investors. The stock declined by 13%, and the company’s bonds fell into distressed territory.
The SEC alleged that Coinbase traded at least thirteen crypto assets that qualify as securities and should have been registered with regulators prior to their issuance. Typically, registration requires providing investors with financial statements and risk disclosures that are reviewed by regulators. The list of assets includes Solana, Cardano, and Polygon tokens.
Coinbase was required to register as an exchange, brokerage, and clearance agency, according to the SEC, because it made these tokens available for trading and the SEC believes they are securities.
“Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase deprived of the disclosures and protections that registration entails and thus exposed to significant risk,” the SEC stated.
The SEC also classified as an unregistered security the Coinbase Earn staking programme, which allows investors to earn interest on their tokens. Previously, Coinbase has maintained that its staking products are not securities.
The largest cryptocurrency exchange in the United States, Coinbase, is one of the few publicly traded cryptocurrency corporations and one of the most well-known. According to FactSet, its largest shareholders are Vanguard, Cathie Wood’s ARK Investment Management, Fidelity, BlackRock, Morgan Stanley, and Goldman Sachs. The companies refused to comment or provided no response.
In April 2021, during the cryptocurrency bull market, Coinbase went public and opened at $381 per share on its first day of trading.
Tuesday’s trading volume for Coinbase shares was approximately $52; however, they are up approximately 50% for the year. Other crypto assets have also increased in value this year, as part of a broader rebound in riskier assets such as technology equities.
Nonetheless, the demise of the cryptocurrency exchange FTX and the precipitous decline in the value of cryptocurrencies have turned many individual investors against digital assets. Coinbase reported its fifth consecutive quarterly loss last month.
In a Monday note, Dan Dolev, a senior financial-technology analyst at Mizuho Securities USA, stated that increased industry scrutiny could place at risk more than one-third of Coinbase’s revenue.
If more digital coins are required to be registered, the “cumbersome process” and “risk of application denial for tokens” could hinder Coinbase’s ability to generate transaction revenues, he said.
In March, the SEC warned Coinbase that it intended to prosecute the company. Coinbase has responded with a legal and public relations campaign, informing lawmakers that the SEC is engaging in a power play by attempting to regulate a new technology that does not belong within its rules.
While contending with domestic regulators, Coinbase has attempted to expand into international markets. Coinbase launched a crypto derivatives exchange in Bermuda in May after obtaining a regulatory licence to conduct business there. Coinbase has released numerous products and services and hired personnel in Singapore, Brazil, and Canada in recent months.
Kaiko, a digital assets data provider, reports that as of April, Coinbase accounted for 53 percent of crypto spot trading volume in the United States but only 6.5% of global volume.
