US SEC sues Coinbase for breaking market rules

The move, a day after it sued Binance and its founder, are part of SEC’s push to assert control over crypto markets.

Coinbase logo on buildings
Cryptocurrency companies, including Coinbase, have accused the SEC of overreaching by asserting oversight of their industry [File: Shannon Stapleton/Reuters]

The United States 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 on Tuesday, is the SEC’s second in two days against a major crypto 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 investing, and protect investors while shoring up their trust in capital markets.

“The crypto markets are undermining that trust, and I would say this: It undermines our overall capital markets,” Gensler told CNBC.

Crypto companies, including Coinbase, have said SEC rules are unclear and the regulator is overreaching by asserting oversight of their industry.

Paul Grewal, Coinbase’s general counsel, said in a statement the company will continue operating as usual and has a “demonstrated commitment to compliance”.

Ten US states led by California are also accusing Coinbase of securities law violations concerning its staking rewards programme.

Shares of Coinbase’s parent, Coinbase Global Inc, were down $6.42, or 10.9 percent, at $52.29 in afternoon trading after falling earlier as much as 20.9 percent.

Coinbase customers withdrew more than $57m within a couple of hours of the SEC filing, data firm Nansen said.

Thirteen crypto assets

In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on 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 by a recent count and ended March with $130bn of customer crypto assets and funds on its balance sheet. Transactions generated 75 percent of its $3.15bn of net revenue last year.

In the staking rewards programme, 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” it provides customers after taking a commission for itself. The SEC has said this too is an unregistered security and violates securities laws.

The states focused on this programme are Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase $5m for selling unregistered securities.

‘Can’t ignore the rules’

Tuesday’s SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. The SEC had warned Coinbase in March that charges might be coming.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones,” SEC Enforcement Chief Gurbir Grewal said in a statement.

Gensler’s crypto crackdown has prompted the industry to boost compliance, shelve products and expand outside the country.

Kristin Smith, CEO of the Blockchain Association trade group, rejected Gensler’s efforts to oversee the industry.

“We’re confident the courts will prove Chair Gensler wrong in due time,” she said.

In the Binance case, the SEC accused that exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform and misleading customers about its controls.

Binance pledged to defend itself vigorously against the lawsuit and said the case reflected the SEC’s “misguided and conscious refusal” to provide clarity and guidance to the crypto industry.

Coinbase’s friction with Gensler dates to 2021 when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea.

The case is SEC v Coinbase Inc et al, US District Court, Southern District of New York, No. 23-04738.

Source: Al Jazeera, Reuters