The SEC’s decision to target Coinbase Global Inc. for enforcement actions sets the stage for a protracted legal battle that threatens the top US crypto exchange and potentially the entire US digital assets sector, legal and industry analysts say.
Coinbase revealed last week that the Securities and Exchange Commission had served it with a Wells Notice, a notification that the agency is planning to recommend enforcement action for alleged securities law violations. Already reeling from its increasing exclusion from the traditional financial system, the US crypto industry sees the Coinbase action as a signal that the SEC—and its determined chairman, Gary Gensler—intend to regulate the industry out of business.
“It is hard to look at what’s happening at the federal regulatory level and not see it’s an existential threat,” said Sheila Warren, CEO of the Crypto Council for Innovation. “Between challenges around obtaining basic banking services, making payroll, to open hostility from this SEC, operating in the US is not for the faint of heart.”
Perianne Boring, founder & CEO of the Chamber of Digital Commerce, said the SEC had “abandoned its mission of protecting investors and is using fear tactics to effectuate a political power grab.”
Neither the SEC nor Coinbase revealed details of the alleged violations, though the Wells notice suggests it could cover most of the company’s business. The company said it believed the allegations related to aspects of its “spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.” The SEC said in its letter that it might recommend “a civil injunctive action, public administrative proceeding, and/or cease-and-desist proceeding, and may seek remedies that include injunctions, a cease-and-desist order, disgorgement, pre-judgment interest, and civil money penalties.”
Coinbase declined to comment, but pointed to a blog post published Wednesday by Chief Legal Officer Paul Grewal.“If needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets,” Grewal wrote. “Until then, it’s business as usual—today’s news does not require any changes to our current products or services.”
The SEC didn’t respond to requests for comment. Chairman Gensler—a former Goldman Sachs partner who established his crypto bona fides teaching a course on blockchain and money at MIT— has said repeatedly that most digital assets are securities and they and the exchanges that trade them should be registered accordingly. To the frustration of the industry, however, the agency hasn’t explained how that can actually be done, even as it has accused numerous crypto firms of breaking securities laws. That approach has led to criticism that the SEC is “regulation by enforcement.”
The Coinbase case goes to the heart of crypto’s battle for regulatory respectability precisely because the company says its been trying for years to be compliant with US securities laws. Grewal noted that Coinbase had met with agency officials dozens of times over the last year in search of a path forward.
Giving Coinbase a Wells Notice “isn’t surprising,” Kayvan Sadeghi, partner at Jenner & Block in New York, said Friday. “It’s the logical outgrowth of the position the SEC has been stating publicly for quite some time.”
“With the spot market and the staking service, it’s pretty clear what they’re going after,” Sadeghi said. “The SEC’s view is that many if not most tokens are securities, and Coinbase’s principle business of trading would require it to register as a securities exchange or an alternative trading service.”
The Catch-22, he said, is that under current law, platforms can’t enable trading in both securities and commodities, and “the SEC recognizes Bitcoin as a commodity, while asserting that the vast majority of other tokens are likely securities.” Additionally, there’s no viable path under existing regulations for companies registered as a broker-dealer to facilitate trading and custody of crypto assets.
For crypto businesses, those are “difficult, if not impossible, problems to overcome,” Sadeghi said, adding that regulators risked driving the industry overseas and putting good actors out of business.
“If the SEC tries to preclude businesses from operating a secondary market without registration, and also fails to provide any viable path to registration,” he said, “that could pose an existential threat to the government oversight of crypto in the United States and risk even greater harm to investors.”
Wells Notices can be successfully defended, though doing so “will likely be difficult and drawn out,” according to Preston Brewer, principal legal analyst at Bloomberg Law. He noted that digital payments company Ripple Labs Inc. “has been doing fairly well” defending itself against an SEC enforcement action in a case that is expected to be decided soon.
“Although Ripple Labs isn’t a large crypto exchange like Coinbase, a decision on those motions could materially affect any settlement between the SEC and Coinbase and/or the filing of an enforcement action against Coinbase,” Brewer said.
The agency’s bruising experience in SEC v. Ripple had exercised “a chilling effect” on its desire to bring enforcement actions, particularly “on things that weren’t actually fraud or bad actors,” said Daniel McAvoy, a shareholder at Polsinelli in New York. “But the collapse of FTX really accelerated things and put the emphasis on policing the industry.”
Sam Bankman-Fried’s FTX empire, which collapsed in November amid allegations of fraud, had also sought fruitlessly to win US regulators over.
“I think this is in part an effort to expand its jurisdiction, to show it’s the main crypto regulator,” McAvoy said. “But I think there’s also a semi-coordinated effort to rein in the industry. You’re going after someone so prominent, someone trying to do things the right way. But that’s long been part of the SEC’s playbook.”
McAvoy said the SEC planned enforcement action “could be” an existential threat for Coinbase, but he cautioned against taking an apocalyptic view, since the details aren’t yet known. If the allegations apply to issues like staking, the company will probably be okay, he said. But if the SEC pursues Coinbase for not registering as a securities exchange—and nothing else changes within the law—that could be the end, he said, “because that’s not how blockchains work.”
Coinbase won’t go down easily, McAvoy said.
“There’s going to be a fight,” he said. “They’ve got a war chest.”
Stuart Alderoty, Ripple’s chief legal officer, said by email the agency’s “invitation to ‘come in and register’ is a bait-and-switch trap. The SEC knows there is no path to registration and its only goal is to bring enforcement actions in an effort to bully and bulldoze responsible actors. This campaign of regulation by enforcement proves that the SEC has no interest in fostering innovation in the US. Unfortunately, unelected bureaucrats are pushing that innovation outside the US where the rules of the road are clear.”
Analysts said the crypto industry’s best hope lies in legislation to adapt US securities laws to encompass digital assets—however unlikely that prospect appears in the current divided Congress.
In the meantime,"Coinbase should expect a long and costly process with the SEC that will demand the attention of its executives, distracting them from running the business at a difficult time for crypto exchanges,” Brewer said.
CCI’s Warren also predicted a protracted battle. “I think it’s safe to say that most players who have resources will back Coinbase in this fight,” she said. “In many ways, as a public company registered all over the world, they are a standard bearer.”
A long and costly battle looms. Ripple said in December that it had already spent roughly $100 million to defend the case.
Analysts said appeals are inevitable regardless of how a trial court decides the issues. That would push out the time horizon for resolution, and further extend the period of regulatory uncertainty.
If the case ends up at the US Supreme Court, the advantage might lie with the company, Sadeghi said.
“I think the SEC is out over its skis on this very expansive view of its own authority that doesn’t have clear support in statutory text or any precedent interpreting the definition of a security,” he said.
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