February 21, 2024

WASHINGTON (Reuters) – The U.S. Securities and Exchange Commission on Tuesday sued Coinbase, the largest U.S. cryptocurrency trading platform, in a bid to end what authorities see as an era of lawlessness in the cryptocurrency market, claiming the company failed to register illegally as a broker.

The SEC, the top U.S. securities regulator, filed a lawsuit a day after accusing the world’s largest cryptocurrency exchange Binance of mishandling customer funds and lying to U.S. regulators and investors about its operations.

With these federal actions against major crypto firms, and other lawsuits at the state level, regulators are attempting to reshape the crypto industry by treating digital asset exchanges like more traditional financial firms, while driving out those they deem to be bad actors. individuals and companies.

In a Tuesday filing, the SEC detailed how Coinbase leaders demonstrated they knew how marketing and sales of digital assets should be governed by U.S. laws, even if they did not comply with those laws.

“Coinbase places its interest in growing profits ahead of investor interests and compliance with the legal and regulatory framework that governs the securities market and is designed to protect investors and U.S. capital markets,” the filing said. The file says.

Coinbase’s listing in April 2021 is seen as a milestone in the entry of cryptocurrencies into the mainstream. The company processed $830 billion worth of transactions last year, and nearly 9 million users make at least one transaction per month.

Coinbase has made billions from selling crypto assets but deprived investors of significant protections, the SEC said. It filed the lawsuit in Manhattan federal court, alleging the company was operating as an unregistered exchange even though it told investors when it went public that regulators may consider certain products traded on its platform to be securities.

Coinbase argued that its business model had the SEC’s tacit approval when the agency approved its IPO. The company has expressed a willingness to work with the SEC, but disagrees with its stance that all digital assets offered on its trading platform must be registered securities, which calls for stricter regulation.

The move is consistent with the SEC’s longstanding view that most crypto products are indistinguishable from stocks, bonds and other securities. That means companies that operate as exchanges and provide platforms for trading and selling crypto products must register like any exchange or brokerage firm that facilitates stock or bond trading.

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

Executives in the crypto industry, keen to challenge the rules and operate outside the heavily regulated confines of the mainstream financial industry, often argue that digital assets are different and that many of the rules for stocks should not apply.

“The SEC’s reliance on enforcement in the absence of clear rules for the digital asset industry is harming U.S. economic competitiveness,” Coinbase’s chief legal officer Paul Grewal said in a statement about the lawsuit.

“The solution is legislation that allows for fair rules of the road to be transparently set and applied equally, not litigation,” added Mr. Grewal, who has no ties to SEC enforcement officials.

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

In addition to Coinbase’s legal troubles, securities regulators in 10 states, including Alabama, California, Illinois and New Jersey, filed lawsuits Tuesday seeking to prevent the company from selling unregistered coins to investors in their states. securities.

State regulators said Coinbase must first register to offer the products in its state. Some states, such as New Jersey, fine company.

The SEC lawsuit and state regulators’ actions against Coinbase touch on a key issue that many in the crypto industry say Congress must address: Are digital asset offerings securities or something else entirely.

The SEC said the test to determine whether a crypto product should be considered a security originated from a 1946 Supreme Court case that led to the so-called Howey test. SEC Chairman Gary Gensler has often said that the standard is clear and no new law is needed to determine whether a digital asset is a security. However, the industry has disagreed.

The SEC’s complaint disputes Coinbase’s assertion that it fully complies with applicable securities laws before offering new digital products for trading, viewing it as an “oral commitment.”

According to the 101-page complaint, “Coinbase has for years been able to trade crypto assets that are part of Howey’s investment contracts. Tested and refined principles of the federal securities laws. “

The lawsuit is long awaited by Coinbase, whose executives and others in the crypto industry want to change the narrative about digital assets. Mr. Grewal of Coinbase testified before a House committee Tuesday on a draft bill to regulate cryptocurrencies. Coinbase says it welcomes regulation and wants to work with SEC

The SEC lawsuit is the latest enforcement action in the regulator’s multiyear crackdown on the cryptocurrency market, which intensified following the November collapse of the FTX cryptocurrency exchange and criminal charges against its founder, Sam Bankman-Fried.

The lawsuit against Coinbase apparently does not include allegations of fraud, such as the complaint against Binance, or the preliminary injunction request against the company. The SEC also sued Binance founder and CEO Changpeng Zhao on Monday. On Tuesday, it did not similarly sue Coinbase CEO Brian Armstrong.

The SEC took another step Tuesday to separate the case against Binance from the case against Coinbase. In a new filing, the agency is asking the court to freeze assets related to Binance’s U.S. customers based outside the U.S. and to transfer any such assets back to the U.S., citing the need for a quick freeze “given the defendant’s years of violations.” , ignoring U.S. laws, evading regulation, and publicly questioning various financial transfers and custody and control of client assets.”

In the filing, the SEC also asked the court to cut off Binance and its senior leaders from any access to its U.S. client assets.The filing contained a summary of bank account information related to Binance’s US operations, indicating that the company had multiple accounts with San Diego-based bank Axos Bank and an account at a closed bank silver door.

Unlike Binance, Coinbase does not issue its own encrypted tokens, arguing that its status as a public company ensures it adheres to strict operating rules.

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

A flurry of legal action against Coinbase, as well as a crackdown on the entire crypto industry, has weighed on the company’s stock price. Shares of Coinbase have fallen about 20% over the past two days.

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