So much for the registration claim. Are clawbacks next?
SEC Sues Coinbase, Alleges It Is Unregistered Broker-Dealer
Lawsuit is agency’s second this week against a crypto hub, following earlier suit against Binance
By Dave Michaels
Updated June 6, 2023 10:06 am ET
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The Securities and Exchange Commission sued Coinbase, the world’s largest crypto platform, on Tuesday, a day after suing crypto exchange Binance. Photo: Dado Ruvic/Reuters
WASHINGTON—The Securities and Exchange Commission on Tuesday sued Coinbase COIN -12.91%decrease; red down pointing triangle, alleging the U.S.’s largest crypto platform violated rules that require it to register as an exchange and be overseen by the federal agency.
The SEC filed the lawsuit in Manhattan federal court. The case is the second in two days against a major crypto exchange, following the regulator’s enforcement action against Binance and its founder Changpeng Zhao on Monday.
A Coinbase spokesman didn’t immediately have a comment.
The SEC alleged that Coinbase traded at least 13 crypto assets that are securities and should have been registered with regulators before they were issued. Registration typically involves giving investors financial statements and detailed risk disclosures that are reviewed by regulators. The list of assets includes tokens known as Solana, Cardano and Polygon.
Because Coinbase made those tokens available for trading and the SEC alleges they are securities, the company was required to register as an exchange, brokerage and clearing agency, the SEC said.
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The lawsuit is the culmination of a two-year effort by SEC Chair Gary Gensler to shift his agency’s enforcement strategy in crypto from the issuers of individual tokens to the online platforms where those assets are traded. While thousands of cryptocurrencies exist at any given time, there are just a handful of exchanges that serve as the access points to the crypto market for most investors.
Companies such as Coinbase allow customers to transfer dollars from their bank accounts and use the money to buy or sell cryptocurrencies. Before such platforms existed, prospective traders often had to find each other using message boards or similarly clunky forums, agree on a price and hope their counterparty was honest.
Tuesday’s lawsuit is another significant move toward regulating the entire crypto industry. The SEC’s strategy has centered on using its enforcement division to subdue the industry and show why its regulations apply to crypto activities. The SEC is now waging battles with some of crypto’s biggest market participants, including Coinbase, Binance and another crypto exchange, Gemini.
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Coinbase shares dropped 17% in early trading.
The SEC warned Coinbase in March that it planned to sue the company. Coinbase has countered with a legal and public-relations campaign, telling lawmakers that the SEC is making a power play to oversee a new technology that doesn’t fit within its rules.
Some Republican House lawmakers have been sympathetic to Coinbase’s concerns. Coinbase chief legal officer Paul Grewal is scheduled to testify on Tuesday before the House Agriculture Committee, which has been considering whether some crypto assets should be treated as commodities and not securities.
Gensler has warned that crypto exchanges need to register with his agency. He has frequently said that such firms handle several functions that securities exchanges can’t, including holding customer assets and clearing transactions.
The solution, Gensler says, is for crypto exchanges to break themselves apart, separating their order-execution, brokerage and clearing functions. The resulting structure would better resemble how Wall Street operates, with stock exchanges, brokers and clearing firms functioning as separate businesses that follow rules tailored to their operations and risks.
Crypto exchanges have resisted Gensler’s demand to remake themselves in the image of Wall Street. They also say many tokens aren’t securities and that coin developers can’t provide financial disclosures like public companies do. That hasn’t persuaded Gensler or his enforcement staff.
“Without that proper disclosure, the public can’t answer a question as to whether it’s just…counterfeiting or a scam or something else,” Gensler said Tuesday on CNBC.
SEC Sues Coinbase, Alleges It Is Unregistered Broker-Dealer
Lawsuit is agency’s second this week against a crypto hub, following earlier suit against Binance
By Dave Michaels
Updated June 6, 2023 10:06 am ET
52
YOU MAY ALSO LIKE
Families of India Train Crash Victims Wait Days to Collect Bodies
0:23
Playing
0:33/2:08
The Securities and Exchange Commission sued Coinbase, the world’s largest crypto platform, on Tuesday, a day after suing crypto exchange Binance. Photo: Dado Ruvic/Reuters
WASHINGTON—The Securities and Exchange Commission on Tuesday sued Coinbase COIN -12.91%decrease; red down pointing triangle, alleging the U.S.’s largest crypto platform violated rules that require it to register as an exchange and be overseen by the federal agency.
The SEC filed the lawsuit in Manhattan federal court. The case is the second in two days against a major crypto exchange, following the regulator’s enforcement action against Binance and its founder Changpeng Zhao on Monday.
A Coinbase spokesman didn’t immediately have a comment.
The SEC alleged that Coinbase traded at least 13 crypto assets that are securities and should have been registered with regulators before they were issued. Registration typically involves giving investors financial statements and detailed risk disclosures that are reviewed by regulators. The list of assets includes tokens known as Solana, Cardano and Polygon.
Because Coinbase made those tokens available for trading and the SEC alleges they are securities, the company was required to register as an exchange, brokerage and clearing agency, the SEC said.
NEWSLETTER SIGN-UP
WSJ Crypto
Smart and accessible crypto market analysis for investors.
Subscribed
The lawsuit is the culmination of a two-year effort by SEC Chair Gary Gensler to shift his agency’s enforcement strategy in crypto from the issuers of individual tokens to the online platforms where those assets are traded. While thousands of cryptocurrencies exist at any given time, there are just a handful of exchanges that serve as the access points to the crypto market for most investors.
Companies such as Coinbase allow customers to transfer dollars from their bank accounts and use the money to buy or sell cryptocurrencies. Before such platforms existed, prospective traders often had to find each other using message boards or similarly clunky forums, agree on a price and hope their counterparty was honest.
Tuesday’s lawsuit is another significant move toward regulating the entire crypto industry. The SEC’s strategy has centered on using its enforcement division to subdue the industry and show why its regulations apply to crypto activities. The SEC is now waging battles with some of crypto’s biggest market participants, including Coinbase, Binance and another crypto exchange, Gemini.
Advertisement - Scroll to Continue
Coinbase shares dropped 17% in early trading.
The SEC warned Coinbase in March that it planned to sue the company. Coinbase has countered with a legal and public-relations campaign, telling lawmakers that the SEC is making a power play to oversee a new technology that doesn’t fit within its rules.
Some Republican House lawmakers have been sympathetic to Coinbase’s concerns. Coinbase chief legal officer Paul Grewal is scheduled to testify on Tuesday before the House Agriculture Committee, which has been considering whether some crypto assets should be treated as commodities and not securities.
Gensler has warned that crypto exchanges need to register with his agency. He has frequently said that such firms handle several functions that securities exchanges can’t, including holding customer assets and clearing transactions.
The solution, Gensler says, is for crypto exchanges to break themselves apart, separating their order-execution, brokerage and clearing functions. The resulting structure would better resemble how Wall Street operates, with stock exchanges, brokers and clearing firms functioning as separate businesses that follow rules tailored to their operations and risks.
Crypto exchanges have resisted Gensler’s demand to remake themselves in the image of Wall Street. They also say many tokens aren’t securities and that coin developers can’t provide financial disclosures like public companies do. That hasn’t persuaded Gensler or his enforcement staff.
“Without that proper disclosure, the public can’t answer a question as to whether it’s just…counterfeiting or a scam or something else,” Gensler said Tuesday on CNBC.
