The Securities and Exchange Commission on Tuesday sued Coinbase, the largest cryptocurrency trading platform in the United States, alleging that the company had violated securities law by failing to register as a broker.
The country’s top securities regulators filed the lawsuit a day after it sued Binance, the world’s largest cryptocurrency trading exchange, for mishandling client funds and lying to US regulators and investors about its activities.
The regulator’s actions against the two major crypto companies reflected a broad-based effort to end what US authorities see as the industry’s era of lawlessness. With this and other lawsuits, the SEC has sought to reshape the crypto sector by grouping digital asset exchanges with more traditional financial firms, such as stock brokers, while forcing out individuals and companies it deems bad actors.
In Tuesday’s filing, the SEC detailed ways Coinbase’s leaders demonstrated they knew how to regulate the marketing and sale of digital assets under U.S. laws, even if they didn’t follow them.
“Coinbase has put its interest in increasing its profits above the interests of investors, and above compliance with the law and the regulatory framework that governs securities markets and was created to protect investors and the U.S. capital markets,” the filing said.
The complaint, which was filed in federal court in Manhattan, alleges that Coinbase operated as an unregistered exchange, even though it told investors at the IPO that there were risks in the way it operated and that some of the products on its platform were traded, as if to be collateral by regulators.
The SEC said Coinbase made billions by enabling the sale of crypto assets as an unregistered exchange, but deprived investors of significant protections.
“You just can’t ignore the rules because you don’t like them or because you prefer others: the consequences for the investing public are far too great,” said Gurbir S. Grewal, the director of the SEC’s enforcement division. said in a statement.
The move is consistent with the SEC’s long-held view that most cryptos are no different from stocks, bonds and other securities and must comply with U.S. law. That means that the companies that operate as exchanges and provide a platform for trading and selling crypto products must be registered like any exchange or brokerage that facilitates the trading of stocks or bonds.
“The SEC’s reliance on an enforcement-only approach, in the absence of clear rules for the digital asset industry, harms America’s economic competitiveness,” said Coinbase chief legal officer, Paul Grewal. SEC Enforcement Director), in a statement about the suit. “The solution is legislation that allows fair rules for the road to be transparently developed and applied equally, not lawsuits,” he added.
Eager to challenge the rules and operate outside the heavily regulated confines of the mainstream financial industry, crypto industry executives have often argued that digital assets are different and many of the strict regulatory rules for stocks should not apply.
“The message here is that regulatory clarity already exists when it comes to exchanges and broker-dealers,” said John Reed Stark, a former SEC enforcement attorney and regulatory consultant.
The lawsuit against Coinbase touched on a critical issue that many in the crypto industry have said should be addressed by Congress.
The SEC has said the test to determine whether a crypto product should be treated as a security derives from a 1946 Supreme Court case that led to what is known as the Howey test. SEC Chairman Gary Gensler has often said that this standard is clear and that no new laws are needed to determine whether a digital asset is a security. However, the industry has begged to disagree.
The SEC complaint challenged Coinbase’s claims that it was fully compliant with applicable securities laws before offering new digital products for trading, dismissing them as “lip service.”
According to the 101-page complaint, “For years Coinbase has made available to trade crypto assets that are investment contracts under the Howey test and established principles of the federal securities laws.”
The lawsuit against Coinbase, which the company has been eagerly awaiting, comes as its executives and others in the crypto industry hope to change the digital asset narrative. Coinbase’s Mr. Grewal will testify before a House committee on Tuesday about a bill regulating crypto. Coinbase has said it welcomes regulation and wants to cooperate with the SEC
The SEC lawsuit is the latest in a multi-year crackdown on the crypto market by the regulator, which has gained momentum after the collapse of the FTX crypto exchange in November and criminal charges against its founder, Sam Bankman-Fried.
Notably, the lawsuit against Coinbase did not contain an allegation of fraud like the complaint against Binance. The SEC also sued Binance founder and CEO Changpeng Zhao on Monday. On Tuesday, it failed to similarly sue Coinbase CEO Brian Armstrong.
Coinbase, unlike Binance, does not issue its own crypto tokens, and the company has argued that its status as a publicly traded company meant it followed strict rules governing its operations.
The company filed a petition with the SEC for new rules last summer and even sued the agency for failing to act on its request in April.
