SEC’s Coinbase Lawsuit Heralds Deepening US Crypto Crackdown (3)

The Securities and Exchange Commission widened its sweeping crackdown on crypto by accusing Coinbase Global Inc. 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 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 Holdings Ltd., alleging a slew of violations.

The SEC moved against Coinbase, the biggest US crypto exchange, after Chair Gary Gensler repeatedly argued that most tokens are subject to his agency’s oversight and that swaths 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.

Read More: SEC Sues Binance and CEO Zhao for Breaking Securities Rules

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% to close at $51.61 in New York trading. At one point on Tuesday, the declines shaved about $1.5 billion off the company’s market capitalization.

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, Changpeng Zhao, mishandled customer funds, misled investors and regulators, and broke securities rules. The SEC sought a temporary restraining order on Tuesday to freeze some assets as part of that case.

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

LISTEN: Mike McGlone, Bloomberg Intelligence Senior Commodity Strategist, discusses the impact of the SEC crackdown on the crypto space. He spoke with hosts Bryan Curtis and Rishaad Salamat on Bloomberg Radio.

Gensler Crackdown

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’?,” he told Bloomberg’s David Westin.

SEC Chair Gary Gensler appears on Bloomberg TV.

Source: Bloomberg

‘Enforcement-Only Approach’

Coinbase was co-founded in 2012 by Brian Armstrong, its chief executive officer. He wasn’t 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. Paul Grewal, the company’s top lawyer, has previously said that those tokens aren’t 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.

“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,” Ashok Ayyar, counsel at Ashbury Legal, said by text message.

Coins Covered

Brian Armstrong, co-founder and chief executive officer of Coinbase.

Photographer: Bryan van der Beek/Bloomberg

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 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.”

Read More: SEC Targets $120 Billion of Tokens With Coinbase, Binance Suits

The question of whether certain tokens are securities has hung over the crypto industry for years. In 2020, the SEC sued Ripple Labs Inc., contending that its XRP token is a security and subject to SEC regulation. A ruling in the case is expected this year.

Staking

The SEC also accused Coinbase of breaking the agency’s rules with its “staking” service. That product offers customers a return in exchange for providing their tokens to be used to facilitate transactions on a blockchain.

The case is U.S. Securities & Exchange Commission v. Coinbase Inc. et al, 1:23-cv-04738, U.S. District Court for the Southern District of New York (Manhattan).

(Updates with court filing in Binance case in fifth paragraph. An earlier version corrected the spelling of Coinbase in deck headline.)

--With assistance from David Westin, David Pan, Vildana Hajric, Emily Nicolle and Lydia Beyoud.

To contact the reporters on this story:
Austin Weinstein in Washington at aweinstein18@bloomberg.net;
Allyson Versprille in Washington at aversprille1@bloomberg.net;
Muyao Shen in New York at mshen118@bloomberg.net

To contact the editors responsible for this story:
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stacy-marie ishmael at sishmael@bloomberg.net

Stephanie Stoughton

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