SEC Files Lawsuit Against Coinbase for alleged unregistered broker and exchange activities, demanding a permanent halt. Coinbase’s shares fell 12% after the lawsuit, following a 9% drop due to charges against Binance. SEC claims Coinbase violated securities laws, while the company argues for transparent legislation instead of litigation.
The Securities and Exchange Commission (SEC) has taken legal action against cryptocurrency exchange Coinbase, accusing the company of operating as an unregistered broker and exchange. The lawsuit, filed in a New York federal court on Tuesday, seeks to permanently restrain Coinbase from continuing these activities. As a result of the news, Coinbase’s shares closed down 12% on Tuesday, following a 9% drop the previous day after the SEC unveiled charges against rival exchange Binance and its founder Changpeng Zhao.
SEC Chair Gary Gensler appeared on media networks like CNBC and expressed concerns about crypto trading platforms, referring to them as exchanges that combine multiple functions. Gensler highlighted that traditional stock exchanges, such as the New York Stock Exchange, do not engage in hedge fund operations. In the SEC’s complaint, it alleges that Coinbase’s flagship prime brokerage, exchange, and staking programs violate securities laws. The regulator claims that Coinbase has evaded disclosure requirements and defied regulatory structures in the United States.
According to the SEC, at least 13 crypto assets available on Coinbase were considered “crypto asset securities.” These assets include tokens such as Solana’s SOL, Cardano’s token, and Protocol Labs’ Filecoin token. Gensler stated that Coinbase, despite being subject to securities laws, unlawfully offered exchange, broker-dealer, and clearinghouse functions. Coinbase’s chief legal officer, Paul Grewal, responded by emphasizing the need for legislation that establishes transparent and fair rules for the digital asset industry, rather than relying solely on enforcement actions.
The SEC’s complaint outlines that Coinbase’s institutional service (Prime), retail exchange, self-custody Wallet service, and staking program all involved one or more crypto asset securities. The staking program, described as an investment contract, is also deemed an unregistered security. The SEC previously compelled the closure of Cryptocurrency exchange Kraken’s staking service through similar action.
The SEC characterizes the staking program as a means for investors to earn financial returns through Coinbase’s managerial efforts. However, Coinbase is likely to contest this assessment, as the company believes the five stackable crypto assets should not be classified as securities under its interpretation of the law. Earlier this year, Coinbase received a Wells notice, indicating impending SEC action. The company has since vigorously defended its offerings, engaging in public disputes with the regulator and preparing for potential legal action through advertising campaigns and publicity.
Coinbase, widely regarded as having the financial and institutional resources to confront the SEC and Gensler, has long positioned itself as a regulated and secure alternative among exchanges. However, the SEC has cited Coinbase’s extensive marketing and sales efforts, which it claims actively solicit new clients, as evidence against the company. The SEC considers solicitation as one of the criteria to determine whether a company operates as a broker or an exchange. Additionally, the SEC relies on the Howey test to determine if an asset qualifies as an investment contract and, therefore, a security. This test evaluates whether an asset involves an investment in a common enterprise, with an expectation of returns through the efforts of others.
