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SEC charges Coinbase the day after Binance, lists 13 tokens as unregistered securities

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(Kitco News) - The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase on Tuesday, accusing the exchange of offering unregistered securities, just one day after it sued Binance on similar grounds.

According to the announcement from the SEC, Coinbase was charged with “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency,” as well as “failing to register the offer and sale of its crypto asset staking-as-a-service program.”

Coinbase is the largest crypto exchange in the country and the second largest in the world after Binance with nearly $1.5 billion in daily trading volume and over 34 million monthly visits according to CoinGecko.

The SEC alleges that since at least 2019, “Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities,” and that their business combines “the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law.” They also accuse the exchange of engaging in an unregistered securities offering through its staking-as-a-service program, which they claim was never registered with the Commission.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler. “In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections.”

The SEC’s complaint was filed in U.S. District Court for the Southern District of New York and alleges that Coinbase violated the registration provisions of the Securities Exchange Act of 1934 and the securities offering registration provisions of the Securities Act of 1933. The lawsuit seeks “injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief,” according to the announcement.

“Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them,” said Gurbir Grewal, Director of the SEC’s Enforcement Division. “While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”

For the broader crypto industry, the most interesting information in the court filings could be the sections that detail the SEC’s rationale for why 13 specific tokens - Solana, Cardano, Polygon, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer, Near, Voyager Token, Dash and Nexo - qualify as securities.

Nearly half of the 101-page filing is devoted to evidence for why each of these tokens are actually unregistered securities in the eyes of the Commission, with page after page of quotes from the companies’ own business and promotional materials and the public statements of their senior leadership. These detailed analyses will no doubt be used by market participants to infer the SEC’s definition of digital securities, which they have declined to provide to date.

The SEC charges come just weeks after the Commission once again refused to share their legal definition and criteria for what constitutes a security in the digital assets space. Coinbase originally filed a petition in July 2022 demanding that the SEC propose and adopt a clear regulatory framework for the cryptocurrency industry in the U.S. and establish guidelines for companies like Coinbase to work from as they build out their businesses.

The petition included 50 questions that covered a wide range of topics related to the regulatory treatment of certain digital assets. Of specific interest for Coinbase, as well as numerous other players in the ecosystem, is the question asking the SEC to provide clarification about its process of determining the classification of a token as a security or a commodity.

In documents filed with the court on May 15, the SEC insisted that they are not obligated to fulfill the demands Coinbase outlined in its petition.

The SEC argued that no applicable laws or regulations impose “an obligation to issue the broad new regulations regarding ‘digital assets’ Coinbase has requested,” nor are they required to do so on a specific timeline.

The SEC also said that they have every right to continue their enforcement actions based on securities regulations already on the books. “Agencies routinely enforce existing rules while considering further amendments to regulatory requirements,” they wrote. “Coinbase’s preference for faster or different regulatory action by the Commission does not entitle it to extraordinary relief from this Court. The petition should be denied.”

In the absence of comprehensive cryptocurrency regulation, today’s lawsuit, and the detailed critiques of 13 tokens that it contains, may constitute the clearest guidance that Coinbase and the U.S. crypto ecosystem can hope to receive from the SEC for the foreseeable future.

Dave Weisberger, CoinRoutes CEO and former managing director of Citigroup, told Kitco News that he found the timing of these moves by the SEC surprising.

“They’ve come just days after Congress proposed a cessation to the agency’s regulation-by-enforcement approach,” he said. “Moreover, Republicans in the House have been circulating a draft bill that would provide a fair and very workable framework for regulating the digital asset industry in the United States.”

Weisberger characterized the Coinbase and Binance lawsuits as “a direct attack against the digital asset industry in the United States,” and said that the allegations made against Coinbase “contain precisely zero evidence of harm” to investors.

“It seems as though the only harm here is that inflicted by the SEC’s heavy-handed actions – namely, potentially fining Coinbase clients into bankruptcy,” he said.

Aaron Kaplan, co-CEO of Prometheum, which recently became the first-ever crypto custodian to receive full SEC approval, told Kitco News that the crypto exchanges really should have seen this coming.

“SEC Chairman Gensler has said multiple times previously that time was running out for virtual currency exchanges to register under the securities laws,” he said. “The enforcement actions against Binance and Coinbase make it clear that time has now run out.”

Kaplan said that the debacles of 2022 proved the crypto industry needed proper regulation and oversight to ensure that “investors are protected, markets are fair and orderly, and that customers' assets are properly segregated, custodied, and secured.”

“The SEC has systematically gone after almost all elements of crypto-related financial services - it began with lending, then staking, then stablecoins, then custody and finally virtual currency exchanges,” he said. “There is a compliant path forward for crypto trading and custody in the United States, but that requires being properly licensed under the federal securities laws.”

Coinbase (COIN) shares fell 16% in early trading Tuesday, opening at a 2023 low of $48.43 after falling over 9% following Monday’s announcement of charges against Binance. At the time of writing, Coinbase was trading at $51.04, down 13% on the session.

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