In an intensified effort to end what authorities see as an era of chaos in the cryptocurrency market, the Securities and Exchange Commission on Tuesday filed a lawsuit against Coinbase, the largest cryptocurrency trading platform in the United States, claiming that the company broke the law by failing to register. as an intermediary.
The Securities and Exchange Commission, the country’s top securities regulator, filed the lawsuit a day after it accused Binance, the world’s largest cryptocurrency exchange, of mishandling customer funds and lying to US regulators and investors about its operations.
With these federal actions against major crypto firms, along with other nationwide lawsuits, regulators have sought to reshape the crypto sector by treating digital asset exchanges like traditional financial firms, while expelling individuals and companies they view as bad actors.
In its filing on Tuesday, the Securities and Exchange Commission (SEC) detailed ways Coinbase leaders have shown they know how the marketing and sale of digital assets should be subject to, even when not followed by, US laws.
“Coinbase has placed its interest in maximizing its profits over the interests of investors, complying with the law and regulatory framework that governs securities markets and was created to protect investors and the US capital markets,” the filing said.
Coinbase went public in April 2021, an event seen as a milestone in cryptocurrency’s march into the mainstream. The company handled $830 billion worth of deals last year, with nearly nine million users making at least one transaction per month.
The Securities and Exchange Commission said Coinbase made billions to facilitate the sale of crypto assets but denied investors significant protection. Its complaint, filed in Manhattan federal court, alleges that the company operates as an unregistered exchange even though it told investors in its public offering that regulators might consider some of the products traded on its platform as securities.
Coinbase argued that its business model had tacit approval from the SEC when the agency approved its initial public offering. The company said it was willing to work with the SEC but disagreed with its position that all digital assets offered on its trading platform must be registered securities, which would require more stringent oversight.
The action aligns with the SEC’s longstanding view that most crypto products are no different from stocks, bonds, and other securities. This means that companies that act as exchanges and provide a platform for trading and selling crypto products must be registered like any exchange or brokerage that facilitates the trading of stocks or bonds.
Grewal, director of the SEC’s Division of Enforcement, said in a statement.
Cryptocurrency industry executives, who have excelled at defying rules and operating outside the highly regulated confines of the mainstream finance sector, have often argued that digital assets are different and that many of the rules about equities should not apply.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is damaging to America’s economic competitiveness,” Paul Grewal, Coinbase’s chief legal officer, said in a statement about the lawsuit.
“The solution is legislation that allows for fair rules of the road to be drawn up transparently and applied equally, not litigation,” added Mr. Grewal, who is not related to the SEC’s law enforcement official.
“The message here is that regulatory clarity is already there when it comes to exchanges and brokers,” said John Reed Stark, a former SEC enforcement attorney and regulatory consultant.
Adding to Coinbase’s legal troubles, securities regulators in 10 states, including Alabama, California, Illinois and New Jersey, filed their own lawsuits on Tuesday seeking to block the company from selling unregistered securities to investors in their states.
State regulators said Coinbase must first register to offer these products in their states. Some states, such as New Jersey, Fines imposed on the company.
The SEC’s lawsuit and actions by government regulators against Coinbase touched on an important issue that many in the crypto industry have said Congress must address: whether digital asset products are securities or something entirely different.
The SEC said the test to determine whether a crypto product should be treated like a security is derived from a 1946 Supreme Court case that led to what is known as the Howey test. SEC Chairman Gary Gensler has often said that this standard is clear and that no new laws are needed to determine whether a digital asset is a security. The industry, however, has responded to vary.
The SEC’s complaint took issue with Coinbase’s claim that it was fully compliant with applicable securities laws before offering new digital products for trading, and dismissed it as a “courtesy.”
According to the 101-page complaint, “Coinbase has for years provided for the trading of crypto assets that are investment contracts under Howey Well-established testing and principles for federal securities laws.”
The lawsuit, long awaited by Coinbase, comes as its executives and others in the crypto industry hope to change the narrative around digital assets. Coinbase’s Mr. Grewal testified before a House committee on Tuesday about a bill regulating crypto. Coinbase said it welcomes regulation and wants to cooperate with the SEC
The lawsuit from the US Securities and Exchange Commission is the latest enforcement in a multi-year crackdown on the cryptocurrency market by the regulator, which has gained momentum following the collapse of cryptocurrency exchange FTX in November and criminal charges against its founder, Sam Bankman-Fred.
The lawsuit against Coinbase specifically did not include an allegation of fraud, like the complaint against Binance, or a request for a preliminary injunction against the company. The Securities and Exchange Commission (SEC) on Monday also filed a lawsuit against Binance founder and CEO Changpeng Zhao. On Tuesday, it did not similarly sue Coinbase CEO Brian Armstrong.
The Securities and Exchange Commission took another step on Tuesday that distinguished between its cases against Binance and the case against Coinbase. In a new filing, the agency asked the court to freeze assets related to US-based Binance customers who are headquartered outside the US, and to return any such assets to the US, arguing that a speedy freeze is necessary “given years of abusive behavior by the defendants, ignoring US laws, evading regulatory oversight, open questions about various money transfers and guarding and monitoring client assets.”
In the filing, the SEC also asked the court to cut off any access Binance and its top leaders may have to the assets of its customers in the United States. The filing contained a summary of bank account information related to Binance’s US business, which showed that the company had multiple accounts with Axos Bank, a San Diego-based lender, along with an account with the closed bank. Silverjet.
Unlike Binance, Coinbase does not issue its own tokens, and the company has argued that its status as a publicly traded company ensures that it follows strict rules about its operations.
The company petitioned the Securities and Exchange Commission (SEC) for new rules last summer and even sued the agency for failing to act on its request in April.
The series of legal actions against Coinbase, and the crackdown on the cryptocurrency industry in general, have taken a toll on the company’s stock price. Coinbase shares are down nearly 20 percent in the past two days.
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