Shocking!!! SEC Sues Coinbase After Binance!

Crypto exchange Coinbase found itself entangled in a legal battle as the Securities and Exchange Commission (SEC) filed a lawsuit in New York federal court, accusing the company of acting as an unregistered broker and exchange. The SEC demanded that Coinbase be “permanently restrained and enjoined” from continuing such activities.

Coinbase shares experienced a significant decline of 12% on Tuesday, following a 9% fall on Monday after the SEC unveiled charges against rival exchange Binance and its founder, Changpeng Zhao. This ongoing legal action adds to the volatility and uncertainty surrounding the cryptocurrency industry.

The SEC alleged in its complaint that Coinbase's flagship prime brokerage, exchange, and staking programs violated securities laws. The regulator claimed that Coinbase had defied regulatory structures and evaded disclosure requirements in the United States for years.

The SEC identified at least 13 crypto assets available to Coinbase customers as “crypto asset securities.” These assets include Solana's SOL token, Cardano's token, and Protocol Labs' Filecoin token. The SEC contends that Coinbase's offerings combined and unlawfully offered exchange, broker-dealer, and clearinghouse functions, despite being subject to securities laws.

Coinbase's chief legal officer, Paul Grewal, stated that the SEC's reliance on an enforcement-only approach without clear rules for the digital asset industry is detrimental to America's economic competitiveness. He emphasized the need for legislation that enables transparent development and fair application of rules. Meanwhile, Coinbase plans to continue its operations unaffected by the ongoing legal proceedings.

According to the SEC, Coinbase's institutional service, Prime, its retail exchange product, and its self-custody Wallet service all offered one or more crypto asset securities. Additionally, the SEC deemed Coinbase's staking program an investment contract and an unregistered security, mirroring similar actions taken against crypto exchange Kraken's staking service.

The SEC categorized Coinbase's staking program as a means for investors to earn financial returns through the exchange's managerial efforts. The SEC considers the five “stakeable crypto assets” as securities based on its interpretation of the law, although Coinbase is likely to contest this assessment.

Coinbase had previously received a Wells notice, indicating pending SEC action, and had actively defended its offerings against the regulator. The company's advertising campaigns and reputation as a regulated and secure platform have positioned it as the only entity in the crypto community capable of challenging the SEC and its chair, Gary Gensler.

The SEC's arguments against Coinbase include claims that the exchange actively solicits new clients through substantial marketing and sales efforts. Solicitation is a factor the SEC considers when determining whether a company operates as a broker or an exchange. Additionally, the SEC relies on the Howey test to identify investment contracts and securities, focusing on the involvement of a common enterprise, reasonable expectations of returns, and work performed by others.

Coinbase's legal confrontation with the SEC marks a critical chapter for the cryptocurrency industry. The outcome of this lawsuit will not only impact Coinbase but also have broader implications for how regulators define and regulate digital assets. As the legal battle unfolds, the industry eagerly awaits legislative clarity that can ensure fair and transparent rules for all stakeholders involved.