US crypto-exchange giant Coinbase has been issued a Wells Notice by the Securities and Exchange Commission (SEC). A Wells Notice indicates that the SEC is considering enforcement action against the exchange over possible violations of US securities laws. Reports first surfaced of an SEC probe into Coinbase mid-last year.
The SEC is required to serve a Wells Notice to give fair warning to individuals or organisations that the SEC intends to commence regulatory enforcement action. It typically takes the form of a letter with only a broad outline of the nature of the infractions alleged and the enforcement proceedings to be initiated. A Wells Notice does not always result in charges or signal that the recipient has violated any law.
Coinbase is one of the largest cryptocurrency exchanges in the world and the few publicly listed companies operating in the blockchain ecosystem. As a result of the Wells Notice, Coinbase’s shares (NASDAQ ticker: COIN) fell 13% in trading on Thursday.
Coinbase will have the chance to prepare a ‘Wells Submission’ in response to the notice. According to the SEC’s Enforcement Manual, the Wells Submission takes the form of a legal brief including both factual and legal arguments to prove why charges should not be brought. The contents of a Wells Submission are public information, and accordingly will be the subject of considerable public interest given the scale of Coinbase’s operations and its status as a publicly listed company. Anything alleged in the Wells Submission may be used against Coinbase in eventual enforcement proceedings.
Coinbase has issued a public statement acknowledging the Wells Notice and expressing its disappointment in the SEC's failure to engage with its efforts to open a dialogue and register with the SEC under US securities laws.
While the specifics of the Wells Notice are not public, Coinbase has confirmed that the notice covers:
“an unspecified portion of [Coinbase’s] listed digital assets, [Coinbase’s] staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet”.
The SEC has increased its efforts to crack down on the crypto sector following the collapse of FTX last year, and staking services such as Coinbase’s Earn are under increased regulatory scrutiny. Just last month, Kraken shuttered its US token staking service and paid USD$30 million in penalties to settle SEC charges that it failed to register the service.
Coinbase co-founder and CEO, Brian Armstrong, responded to the Wells Notice in a Twitter thread:
Armstrong was joined on Twitter by a number of industry peers who expressed disappointment in the SEC's failure to engage with Coinbase on possible avenues to registering their business with the regulator. Several lamented the SEC's continued regulation by enforcement approach and its frequently repeated claim that crypto businesses can simply "come in and register" with the SEC. There has been widespread calls from industry to support Coinbase's defence of the SEC's allegations and lobby for legislative reforms to provide a clear regulatory framework for crypto assets.