The US Securities and Exchange Commission (SEC) has sued Coinbase, accusing the largest US cryptocurrency platform of operating illegally because it failed to register as an exchange.
The lawsuit, filed Tuesday, is the SEC’s second in two days against a major cryptocurrency exchange following its case against Binance, the world’s largest cryptocurrency exchange, and its founder, Changpeng Zhao.
Both civil cases are part of SEC Chairman Gary Gensler’s push to assert jurisdiction over crypto markets, which he called a “Wild West” of investments, and protect investors while bolstering their confidence in the capital markets.
“Crypto markets are undermining that trust, and I would say this: it undermines our capital markets in general,” Gensler told CNBC.
Crypto companies, including Coinbase, have said the SEC’s rules are unclear and that the regulator is overstating its oversight of the industry.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as usual and has a “demonstrated commitment to compliance.”
Ten US states led by California are also accusing Coinbase of securities law violations regarding its staking rewards program.
Shares of Coinbase parent Coinbase Global Inc were down $6.42, or 10.9 percent, at $52.29 in afternoon trading after earlier falling 20.9 percent.
Coinbase customers withdrew more than $57 million within a couple of hours of the SEC filing, data firm Nansen said.
Thirteen crypto assets
In its complaint filed in federal court in Manhattan, the SEC said Coinbase has made billions of dollars since at least 2019 operating as an intermediary in cryptocurrency transactions, while evading disclosure requirements meant to protect investors
The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Founded in 2012, Coinbase served more than 108 million customers at a recent count and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75 percent of its $3.15 billion in net income last year.
In the staking rewards program, which has about 3.5 million customers, Coinbase pools crypto assets and uses them to support activity on the blockchain network in exchange for “rewards” that it offers to customers after charging a commission The SEC has said this is also an unregistered security and violates securities laws.
The states focused on this program are Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase $5 million for selling unregistered securities.
“You can’t ignore the rules”
Tuesday’s SEC lawsuit seeks civil penalties, recovery of ill-gotten gains and injunctive relief. The SEC had warned Coinbase in March that charges could be coming.
“You can’t just ignore the rules because you don’t like them or because you prefer different ones,” SEC Chief Enforcement Officer Gurbir Grewal said in a statement.
Gensler’s crypto crackdown has prompted the industry to increase compliance, shelve products and expand overseas.
Kristin Smith, CEO of the trade group Blockchain Association, dismissed Gensler’s efforts to oversee the industry.
“We are confident that the courts will prove President Gensler wrong in due course,” he said.
In the Binance case, the SEC accused the exchange of inflating trading volumes, diverting client funds, improperly commingling assets, failing to keep wealthy US clients off its platform, and misleading clients about its controls
Binance committed to vigorously defend the suit and said the case reflected the SEC’s “misguided and willful refusal” to provide clarity and guidance to the crypto industry.
Coinbase’s friction with Gensler dates back to 2021 when the SEC threatened to sue if Coinbase allowed users to earn interest by lending digital assets. The company dismissed the idea.
The case is SEC v. Coinbase Inc et al, US District Court, Southern District of New York, No. 23-04738.
