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Coinbase and Tron become the latest targets of the SEC

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(Kitco News) - Enforcement actions by the Securities and Exchange Commission (SEC) against cryptocurrency companies continue to mount with Coinbase becoming the latest target after the regulator issued a “Wells notice” to the top U.S. crypto exchange on Wednesday.

“Today, we are disappointed to share that the SEC gave us a “Wells notice” regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation,” the exchange wrote in a blog.

A Wells notice is a method that SEC staff use to inform a company that they are recommending that the SEC take enforcement action against a possible violation of securities laws. While they do not represent a formal charge or lawsuit, they often lead to one.

Coinbase said the notice does not provide much additional information that would allow them to craft a legal response, just that the SEC staff has identified potential securities law violations.

“We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” the blog said. “Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to.”

While the exchange said it is open to working with the SEC, it noted that the “Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only.”

And it's not just Coinbase who shares this view, as numerous industry peers and even the U.S. courts have questioned SEC methods in recent months.

“Even courts are questioning the SEC’s inconsistent positions and lack of guidance to the industry,” Coinbase wrote. “Federal Bankruptcy Judge Michael Wiles in the recent Voyager case shared his findings in a ruling against the SEC that makes clear that the SEC is on shaky ground when it comes to the Commission’s recent views of cryptocurrencies being a security.”

The exchange reiterated that it is open to working with the SEC to ensure that it follows all applicable laws, but insisted the relationship needs to work both ways.

“Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering,” the exchange wrote. “In the meantime, the U.S. cannot afford for regulators to continue to threaten the good actors in the crypto industry for doing the same legal and compliant things they’ve always done.”

The crypto community has rallied behind the exchange as many have had enough of the regulation-by-enforcement approach that the regulator has taken toward the crypto industry, providing little guidance to industry players while being quick to file lawsuits or order businesses to cease and desist activities.

SEC targets the Tron ecosystem

The SEC also announced on Wednesday that it was suing Chinese cryptocurrency entrepreneur Justin Sun, creator of the Tron cryptocurrency ecosystem, accusing him and several prominent influencers of illegally selling crypto securities and conspiring to artificially inflate trading volume in crypto assets.

The charges were filed against Sun and three of his wholly-owned companies – Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent) – for the unregistered offer and sale of crypto asset securities Tronix (TRX) and BitTorrent (BTT).

The charges include fraudulently manipulating the secondary market for TRX through extensive wash trading, and orchestrating a scheme to pay celebrities to tout TRX and BTT.

Eight celebrities, including Lindsay Lohan, Jake Paul, Soulja Boy, Austin Mahone, Kendra Lust, Lil Yachty, Ne-Yo and Akon were also charged in the marketing scheme, which involved “illegally touting TRX and/or BTT without disclosing that they were compensated for doing so and the details of their compensation.”

The SEC alleges that beginning around August 2017, Sun and his companies “offered and sold TRX and BTT as investments through multiple unregistered ‘bounty programs,’ which directed interested parties to promote the tokens on social media, join and recruit others to Tron-affiliated Telegram and Discord channels, and create BitTorrent accounts in exchange for TRX and BTT distributions.”

In the SEC’s view, TRX and BTT were sold as securities, so their sale needed to be registered with the regulator. Sun has also been charged with violating the anti fraud and market manipulation provisions of the federal securities laws.

“From at least April 2018 through February 2019, Sun allegedly directed his employees to engage in more than 600,000 wash trades of TRX between two crypto asset trading platform accounts he controlled, with between 4.5 million and 7.4 million TRX wash traded daily,” the SEC wrote. “This scheme required a significant supply of TRX, which Sun allegedly provided. As alleged, Sun also sold TRX into the secondary market, generating proceeds of $31 million from illegal, unregistered offers and sales of the token.”

Sun has since responded to the accusations, saying that the complaint “lacks merit,” and suggesting that “the SEC's regulatory framework for digital assets is still in its infancy and is in need of further development.”

The Tron creator added, “We are eager to collaborate with governments and regulatory bodies globally that are dedicated to establishing transparent guidelines for regulating and working with the cryptocurrency industry given the important role it can play.”

As for the celebrities named in the SEC's enforcement action, with the exception of Soulja Boy and Austin Mahone, the parties agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the charges, without admitting or denying the SEC’s findings, the SEC said.

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