SEC Sues Coinbase, Accuses Crypto Platform of Violating Market Rules

In a desperate bid to end what authorities see as an era of lawlessness in the cryptocurrency market, the Securities and Exchange Commission on Tuesday sued Coinbase, the largest U.S. crypto trading platform, saying the company violated the law by failing to register. As a broker.

The SEC, the country’s top securities regulator, filed the lawsuit a day after it accused the world’s largest cryptocurrency trading exchange of mishandling customer funds and lying to US regulators and investors about its operations.

With these federal actions against major crypto companies, along with other lawsuits at the state level, regulators have sought to reshape the crypto industry and treat digital asset exchanges as traditional financial institutions, while weeding out individuals and companies they consider bad actors.

In Tuesday’s filing, the SEC described ways Coinbase’s leaders demonstrated they knew how the marketing and sale of digital assets should be governed under U.S. laws, even though they failed to follow them.

“Coinbase has placed its interest in maximizing its profits above the interests of investors, and complies with the legal and regulatory framework that governs the securities markets and was created to protect investors and the US capital markets,” the filing said.

Coinbase went public in April 2021, which is considered a milestone in crypto’s mainstreaming. The company handled $830 billion worth of trades last year, with nearly nine million users making at least one trade per month.

Coinbase made the sale of crypto assets easier, but lost significant protection for investors, the SEC said. Its complaint, filed in federal court in Manhattan, says the company operated as an unregistered exchange, although some of the products traded on its platform to public investors could be considered securities by regulators.

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Coinbase argued that its business model received implicit approval from the SEC when the company approved its initial public offering. The company has said it is willing to work with the SEC, but disagrees with its position that all digital assets offered on its trading platform must be registered securities, which would require more stringent oversight.

The move is consistent with the SEC’s long-standing view that most crypto products are no different from stocks, bonds and other securities. This means that companies that act as exchanges and provide a platform for trading and selling crypto products must be registered as any exchange or brokerage that facilitates stock or bond trading.

“You can’t just ignore the rules because you don’t like them or because you want different rules: the consequences for the investing public are too great,” said Gurbir S., director of the SEC’s Division of Enforcement. Grewal, said in a statement.

Executives in the crypto industry often argue that digital assets are different and that many of the same rules as stocks should not apply, challenging the rules and operating outside the heavily regulated confines of the mainstream financial sector.

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry harms America’s economic competitiveness,” Paul Grewal, Coinbase’s chief legal officer, said in a statement about the case.

Mr., who is not related to the SEC enforcement officer. Grewal added, “The solution is a law that allows fair rules of the road to be openly created and applied equitably.

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“The message here is that regulatory clarity already exists when it comes to exchanges and broker-dealers,” said John Reed Stark, a former SEC enforcement attorney and regulatory consultant.

Adding to Coinbase’s legal woes, securities regulators in 10 states, including Alabama, California, Illinois and New Jersey, filed their own actions on Tuesday seeking to block the sale of unregistered securities to investors in their states.

State regulators said Coinbase must first register to offer those products in their states. Some states like New Jersey Fined on the company.

The SEC case and actions by state regulators against Coinbase touch on an important issue that many in the crypto industry say Congress needs to address: Are digital asset products securities or something else entirely?

The test for determining whether a crypto product should be treated as a security derives from a 1946 Supreme Court case known as the Howie test. SEC Chairman Gary Gensler has often said that the standard is clear and that no new laws are needed to determine whether a digital asset is a security. However, the industry begs to differ.

The SEC complaint took issue with Coinbase’s claims that it fully complied with applicable securities laws before offering new digital products for trading, dismissing them as “lip service.”

According to the 101-page complaint, “Coinbase has been available for years to trade crypto assets that are investment contracts under Howie. Tested and well-established principles of federal securities laws.”

Coinbase’s long-awaited lawsuit, which its executives and others in the crypto industry hope will change the narrative of digital assets. Coinbase’s Mr. Grewal testified before a House committee on Tuesday. Coinbase has said it welcomes the regulation and intends to cooperate with the SEC

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The SEC case is the latest enforcement of a years-long crackdown on the crypto market, which gained momentum after the collapse of the FTX cryptocurrency exchange in November and criminal charges against its founder, Sam Bankman-Fried.

The case against Coinbase does not specify a fraud allegation, such as a complaint against Binance or a preliminary injunction against the company. The SEC sued Changpeng Zhao, founder and chief executive of Binance, on Monday. On Tuesday, it similarly declined to sue Coinbase’s chief executive, Brian Armstrong.

Coinbase, unlike Binance, does not issue its own crypto tokens, and the company has argued that its status as a publicly listed company ensures that it follows strict rules regarding its operations.

The company petitioned the SEC for new rules last summer and sued the agency in April for failing to implement its request.

A flurry of legal action against Coinbase and a crackdown on the crypto industry in general have weighed on the company’s stock price. Coinbase shares have fallen about 20 percent in the past two days.

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