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  • J Huang and M Bacina

SEC doubles down on Coinbase, gets dealt a Court order back

The US Securities and Exchange Commission (SEC) just doubled down on its regulation by enforcement efforts by suing Coinbase, the only publicly-listed US crypto-exchange, following the SEC's decision to charge Binance and its founder for allegedly breaching US securities laws this week.

In a massive 101-page-long compliant, the SEC charged Coinbase with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.

According to the SEC, since 2019 Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that,

Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the Commission as required by law

Further, the SEC alleged that since 2019, Coinbase has been engaging in an unregistered securities offering through its staking program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts.

The SEC explained that through this program, Coinbase allegedly pools each type of customers’ stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool. The SEC claimed that Coinbase should have registered its offers and sales of this staking program as required by law.

The SEC's chair Gary Gensler, who in April was grilled by the US Congress for failing to comment on whether Ether is a security, said Coinbase failed to comply with securities laws and

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

The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief from Coinbase. Following the SEC's announcement, Coinbase share price plummeted around 19% but soon recovered half the loss.

Coinbase CEO Brain Armstrong has publicly responded to the SEC's complaint, saying the Coinbase team is

confident in our facts and the law

and that it welcomes the chance

to finally get some clarity around crypto rules

Armstrong also made the other tweets restating Coinbase's position:

Coinbase has long been seeking regulatory clarity from the SEC but to no avail, with the SEC recently shifting to a position that "the rules have always been clear", which stnads in stark contrast to the jurisdictions around the world working on tailored regulation for crypto-assets.

In July 2022, Coinbase filed a petition to the SEC in want of a clear and workable regulatory regime, but the latter denied to respond. Rather, the SEC issued a Wells Notice to Coinbase in March 2023, indicating that it was considering the enforcement action which has now occurred. In April 2023, Coinbase sued the SEC for its failure to respond to the petition, which led to the SEC being ordered by court to explain its failure to respond. In a curious twist, the Court in that case responded to the SEC lawsuit against Coinbase by ordering the SEC to urgently respond, which pushes back against the SEC's previous position which was that the SEC could take as long as it wished to respond to the petition. The order is below:

These orders will apply significant pressure on the SEC and are a rare court initiated order which the SEC appears to have provoked with the lawsuit filed.

While the SEC's allegations against Coinbase are less scathing than those against Binance, the consecutive complaints against two of the world's biggest crypto-exchanges signals the SEC's approach to regulation by enforcements after (or as some might say, in response to) FTX's collapse. This stands in stark contrast with the approach adopted by other jurisdictions, including the EU, Singapore and Hong Kong, which are seeking to better regulate the industry through parliament's legislative frameworks and support the innovation blockchain brings.


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