The Securities and Exchange Commission (SEC) has taken legal action against Coinbase, the largest cryptocurrency trading platform in the United States. The SEC alleges that Coinbase operated as an unregistered national securities exchange, broker, and clearing agency, going against the traditional separation of these roles in securities markets.
According to the SEC, Coinbase’s failure to register has deprived investors of certain protections. These protections include SEC inspections, safeguards against conflicts of interest, and recordkeeping requirements. The agency argues that Coinbase does not qualify for any exemptions from registration for any of these functions. It further accuses the company of unlawfully facilitating the buying and selling of crypto asset securities and making billions of dollars from transaction fees since at least 2019.
Gurbir S. Grewal, the director of the SEC’s Division of Enforcement, emphasized that ignoring rules has significant consequences for the investing public. He stated, “Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled.”
The SEC’s complaint comes after an investigation into Coinbase last July regarding the potential illegal sale of unregistered securities. On the same day, Coinbase’s chief legal officer, Paul Grewal, was scheduled to testify before a congressional committee on a new draft bill related to crypto regulations. Coinbase previously received a notice from the SEC in March, indicating potential securities law violations but without providing detailed information. The company claims to have submitted multiple registration proposals to the SEC, all of which were ultimately unanswered.
In addition to the action against Coinbase, the SEC has also filed 13 charges against Binance, a leading cryptocurrency exchange, and its CEO Changpeng Zhao. The agency alleges that Binance circumvented its own compliance measures and misled investors and regulators. The SEC also accused Coinbase of mishandling customer funds. Furthermore, the agency is involved in the government’s case against Sam Bankman-Fried, the founder and former CEO of FTX.
Coinbase is also facing regulatory scrutiny at the state level. A task force composed of state regulators from Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin issued a Show Cause Order against the exchange. The Alabama Securities Commission accused Coinbase of violating securities laws by offering its staking rewards program accounts to Alabama residents without proper registration. The company has been given 28 days to show cause as to why it should not be ordered to cease and desist from selling unregistered securities in the state.
In summary, the SEC has taken legal action against Coinbase, alleging that the company operated as an unregistered securities exchange, broker, and clearing agency. Coinbase’s failure to register has been deemed detrimental to investors, depriving them of necessary protections. The regulatory scrutiny faced by Coinbase extends to both the federal and state levels, reflecting the increasing focus on cryptocurrency regulations and the need for adherence to applicable laws and guidelines.
