SEC Sues Coinbase on Unregistered Securities Exchange Allegations

The U.S. Securities and Exchange Commission (SEC) sued U.S crypto exchange Coinbase (COIN) on allegations of violating federal securities law, a day after filing a similar suit against Binance.

According to the SEC, Coinbase has operated as an unregistered broker, exchange and clearing agency simultaneously, arguing that it solicited customers, handled orders, allowed for bids and acted as an intermediary all at once. The suit named Coinbase, Inc. and Coinbase Global, Inc. as defendants, but did not name founder and CEO Brian Armstrong or any other executive.

“The Coinbase Platform merges three functions that are typically separated in traditional securities markets – those of brokers, exchanges, and clearing agencies,” the SEC suit said. “Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets.”

In a press release Tuesday, SEC Chair Gary Gensler said these different functions were “commingled.”

“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,” he said.

In a statement, Coinbase Chief Legal Officer Paul Grewal, who is also testifying before the House Agriculture Committee on Tuesday, called for crypto-specific legislation to be developed.

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual,” he said.

Coinbase founder and CEO Brian Armstrong tweeted that the complaint “is exclusively focused on what is or is not a security,” while also reiterating longstanding industry complaints that the “SEC has taken a regulation by enforcement approach.”

The SEC pointed to Coinbase’s Prime, Wallet and staking products, as well as the actual tokens it lists, as areas where it violated federal securities laws.

Coinbase knew some of the cryptos it made available to U.S. customers may have checked the boxes for securities, the SEC argued, pointing to its Crypto Ratings Council effort, which the exchange spearheaded in 2019 to try and create an informal system to assess whether a cryptocurrency was a security.

“During this period, Coinbase made available on the Coinbase Platform crypto assets with high ‘risk’ scores under the CRC framework it had adopted,” the SEC said. “In other words, to realize exponential growth of the Coinbase Platform and boost its own trading profits, Coinbase made the strategic business decision to add crypto assets to the Coinbase Platform even where it recognized the crypto assets had the characteristics of securities.”

The suit went on to allege that Coinbase “identified ‘problematic statements'” by issuers, meaning anything an issuer said that might mean the issued token was a security.

The SEC identified tokens issued by foundations and companies or tied to protocols including Solana (SOL), Cardano (ADA), Polygon (MATIC), Sandbox (SAND), Filecoin (FIL), Axie Infinity (AXS), Chiliz (CHZ), Flow (FLOW), Internet Computer (ICP), Near (NEAR), Voyager (VGX), Dash (DASH) and Nexo (NEXO) as securities in the suit.

Each of these tokens are available on Coinbase’s Prime or Wallet services, the SEC said. The suit further detailed these tokens’ histories and how the SEC viewed them as securities.

The SEC also pointed to Coinbase’s public registration statement, noting that in its risk factors section, it acknowledged that some of the assets it listed may be securities.

The SEC first warned Coinbase it might sue the exchange earlier this year, sending a Wells Notice, which Coinbase responded to in April.

In Tuesday’s suit, the SEC alleged Coinbase violated the Exchange Act through its failure to register across four different counts, as well as violated the Securities Act, and is seeking to “permanently enjoin” the company from continued violations and force disgorgement and civil penalties.

Unlike its Binance lawsuit, the SEC did not allege that Coinbase commingled customer or allowed company executives to transfer such funds to other entities.

UPDATE (June 6, 2023, 12:50 UTC): Adds additional detail and links.

UPDATE (June 6, 14:30 UTC): Corrects references to some tokens identified by the SEC that are tied to protocols, and aren’t issued by them, adds additional links and context, as well as a statement from Coinbase.

UPDATE (June 6, 17:30 UTC): Adds Brian Armstrong tweet.

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