• J Markezic and S Pettigrove

SEC investigating Coinbase for dealing in unregistered securities




Earlier this week, Bloomberg reported that the US Securities and Exchange Commission (the SEC) is probing Coinbase - a prominent cryptocurrency exchange - on suspicion that it allowed US consumers to trade unregistered securities.


The investigation follows the SEC's announcement late last week that it was initiating proceedings against a former employee of Coinbase and two associates on insider trading charges relating to nine tokens which are listed on the cryptocurrency exchange. The SEC claims those tokens are securities (i.e. investment contracts) under the Howey test. The SEC Chair, Gary Gensler has previously said that he believes Coinbase ought to register as a national securities exchange by virtue of the nature of some of the cryptocurrencies they offer.


In response, Coinbase has been critical of the SEC's investigation, citing the lack of clear rules for defining cryptocurrencies as securities. Coinbase's Chief Legal Officer, Paul Grewal said to Coindesk:

We are confident that our rigorous diligence process – a process the SEC has already reviewed – keeps securities off our platform, and we look forward to engaging with the SEC on the matter.

The latest revelation cast the SEC's decision to prosecute Coinbase's former employee and his associates in a new light. The decision to pursue insider trading charges had been criticized by some as an odd way for the SEC to seek to set precedent on what is or is not a security in circumstances where:

  • The SEC could have left it to the US Department of Justice to pursue wire fraud charges (which it has done in parallel with the SEC action) rather than filing a securities fraud complaint which will require it to establish that one or more of the nine tokens in issue are in fact securities;

  • The three individuals charged by the SEC present potentially easy targets for the SEC rather than litigating the important question of whether certain tokens may be a security against an issuer or exchange which would have had to satisfy itself that they were not securities before proceeding to issue or list those tokens.

It now appears that the SEC's decision to pursue insider trading charges against the three individuals could be a prelude to a broader battle between the SEC and Coinbase over what constitutes a security under US law.


In Australia, individuals and entities require an Australian Financial Services Licence to issue or deal in financial products, which may include digital assets in some circumstances. Significant civil and criminal penalties may apply for carrying on a financial services business without an AFSL. ASIC has issued guidance in the form of Information Sheet 225 indicating that it expects those involved in issuing or dealing in digital assets to seek legal advice as to whether any token they are dealing in may be a financial product.