SEC’s Push for Jurisdiction

The United States Securities and Exchange Commission has filed a lawsuit against Coinbase, the top cryptocurrency exchange in the U.S., for operating in violation of the law by not registering with the regulatory body prior to its operations. This is the SEC’s second lawsuit in two days against a major crypto exchange, following its case against Binance, the world’s largest cryptocurrency exchange, and founder Changpeng Zhao.

Both civil cases are part of SEC Chair Gary Gensler’s push to assert jurisdiction over crypto markets, which he on Tuesday again labeled a “Wild West” of investing, and protect investors while shoring up their trust in capital markets. “The cryptomarkets are undermining that trust, and I would say this: it undermines our overall capital markets,” Gensler told CNBC on Wednesday.

Coinbase to Continue Operating as Usual

Coinbase’s general counsel, Paul Grewal, said in a statement, “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 added that the company will continue operating as usual.

Shares of Coinbase’s parent Coinbase Global Inc were down $9.37, or 16.2%, at $49.33, after earlier falling as much as 20.9%. In a complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

Ignoring Federal Securities Laws

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano, and Polygon. Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion of net revenue last year.

Tuesday’s complaint addressed several aspects of Coinbase’s business including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service. In the staking program, Coinbase pools crypto assets and uses them to facilitate activity on the blockchain network, in exchange for “rewards” it provides customers after taking a commission for itself. The SEC said Coinbase was “fully aware” that its business was subject to federal securities laws but ignored it.

Consequences of Ignoring Rules

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones,” SEC Enforcement Chief Gurbir Grewal said in a statement. Tuesday’s lawsuit seeks civil fines, the recouping of ill-gotten gains, and injunctive relief. The SEC had in March warned Coinbase that securities charges might be coming.

Coinbase’s friction with Gensler dates back to 2021 when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea. In the Binance case, the SEC accused that exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy U.S. customers off its platform, and misleading customers about its controls. Binance pledged to defend vigorously against the lawsuit and said the case reflected the SEC’s “misguided and conscious refusal” to provide clarity and guidance to the crypto industry.