Just a day after Binance was sued, the United States Securities and Exchange Commission (SEC) has filed a lawsuit against Coinbase, the largest cryptocurrency exchange operating in the United States.
The SEC alleged that Coinbase has been violating the laws since “at least 2019” by failing to register both a cryptocurrency trading platform and crypto asset hoarding program. SEC Division Director of Enforcement Gurbir S.
“You can’t simply ignore the rules because you don’t like them or because you prefer different rules: the consequences for the investment public are too great,” Grewal said. As alleged in our complaint, Coinbase was fully aware of the applicability of federal securities laws to its business activities, but willfully refused to follow them.”
The protections denied to Coinbase investors include “inspections by the SEC, record-keeping requirements, and safeguards against conflicts of interest, among other things,” the press release said. SEC Chairman Gary Gensler specified that “Coinbase’s alleged failures deny investors important protections, including rulebooks that prevent fraud and manipulation, appropriate disclosure, safeguards against conflicts of interest, and routine inspections by the SEC.”
Coinbase’s chief legal officer and general counsel Paul Grewal provided Ars with a statement that echoes Coinbase’s longstanding position that the SEC’s crackdown on cryptocurrency exchanges is an overreach. Coinbase maintains that Congress needs to pass clear laws on digital assets before enforcement can be adequate.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry hurts America’s economic competitiveness and companies like Coinbase that have a clear commitment to compliance,” said Coinbase’s Grewal. The solution is legislation that allows fair rules of the road to be developed transparently and applied equally and not litigated. In the meantime, we will continue to conduct our business as normal.”
The SEC’s complaint was filed Tuesday morning in the US District Court for the Southern District of New York, asking for a jury trial and “seeking injunctive relief, nullification of wrongful gains as well as interest, penalties, and other equitable remedies.”
The Wall Street Journal reported that immediately after the lawsuit was filed, the value of Coinbase shares dropped by about 20 percent. Meanwhile, the entire cryptocurrency market has been rocked by back-to-back lawsuits against Binance and Coinbase, as reported by Forbes, with the bitcoin price dropping to its lowest value in the past two months, $25,500. Last week, Gensler told CNBC that deposit fees were critical because cryptocurrency markets were undermining confidence in capital markets in general, Reuters reported.
Earlier this year, Coinbase’s Grewal was criticized in an SEC blog for making “legal threats” without naming digital assets that the SEC considers securities.
“We are confident in the legality of our assets and services and, if necessary, welcome legal action to provide the clarity we have been advocating for and to establish that the SEC has not been fair or reasonable when it comes to its involvement on digital assets,” Coinbase’s Grewal wrote.
In the SEC complaint, the SEC finally explains why the agency considers 13 crypto assets as securities — because Coinbase makes them “available for trading in crypto assets that are offered and sold as investment contracts, and therefore as securities.” Among the crypto assets that the SEC lists as securities are tokens with the trading symbols “SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO.” Following the same logic, Coinbase’s marketing potential gains by pooling crypto assets through the staking program also count as an investment contract, the SEC said, which are defined in the suit as follows:
“Investment contracts are instruments by which a person invests money in a joint venture with a reasonable expectation of profits or returns to be derived from the entrepreneurial or managerial efforts of others.”
As of March, Coinbase’s Grewal denied that any digital assets available on Coinbase are securities. He explained on his blog that Coinbase has developed a strict system to determine if a token is a security in order to have it removed from the platform and to reject more than 90 percent of digital assets that can be considered securities.
However, the SEC alleged in its complaint that greed prompted Coinbase to make digital assets available on its platform that were considered “high risk” by its own framework.
“In order to achieve the exponential growth of the Coinbase platform and enhance its trading profits, Coinbase made a strategic business decision to add crypto assets to the Coinbase platform even when it realized that crypto assets had the characteristics of a security,” the complaint said.
In his blog post, Coinbase’s Grewal also claimed that Coinbase has tried to work with the SEC to ensure compliance with its operations. That included meeting with the SEC “more than 30 times over nine months,” he wrote, and spending “millions of dollars in legal support to build “proposals in response to the SEC’s request” to provide our opinions on Coinbase’s filing path. “.
While Gensler said Coinbase ignored the SEC rules, Coinbase maintains that there is “no current way for cryptocurrency exchanges to register” with the SEC.
Further, Coinbase’s Grewal writes that in 2021, Coinbase will go public after submitting its business plan to the SEC, which was declared effective. Some critics on Twitter suggested that the SEC should not allow Coinbase to be traded publicly if it is not in compliance.
However, in the SEC’s complaint, the agency determined that the listing’s announcement as effective “does not constitute an opinion of the SEC or staff about the legality of, or an endorsement of, the issuer’s underlying business.” The SEC also stated that Coinbase in its SEC disclosures and annual reports has consistently indicated that “a securities clearing and settlement facility may be subject to registration with the SEC as a clearing agency.”
In March, Coinbase’s Grewal said that Coinbase is confident it can beat any SEC charges that could come along.
“We continue to believe that rulemaking and legislation are better tools for defining the law for our industry than enforcement,” said Grewal of Coinbase. “But if necessary, we welcome the opportunity for Coinbase and the broader crypto community to obtain clarity in court.”
Congress weighs the new rules
The benefits of the SEC’s efforts to protect cryptocurrency investors could come at a cost, CEO of the tech industry group Adam Kovacevic said in a statement provided to Ars. Kovacevic said the SEC filed a “bad faith lawsuit” that was filed after Coinbase made “every effort to comply with the law.” Kovacevic warned that by cracking down on platforms willing to pursue regulatory compliance, the SEC could make the crypto industry less safe in the US.
At least some members of Congress agree with the tech group. In April, the House Financial Services Committee held a hearing on SEC oversight, where committee chairman Patrick McHenry (R.N.) told Gensler that “his approach is driving innovation abroad and endangering American competitiveness.”
Saying that “Congress should provide clear rules of the road for the digital asset ecosystem,” McHenry also criticized the SEC for requesting “an additional $78 million to expand your enforcement agenda, while at the same time refusing to provide clarity on whether digital assets Offered as part of an investment contract is subject to securities laws and more importantly how these companies must comply with those laws.”
“You’re penalizing digital asset companies for allegedly not complying with the law when they didn’t know it would apply to them,” McHenry said. “This is illogical.”
While the SEC filed charges against Binance, the world’s largest cryptocurrency exchange, and Coinbase this week, McHenry unveiled a bill. He appears to be hoping to convince Democrats and Republicans to compromise on accepted crypto regulations that could end the SEC’s crackdown on cryptocurrency.