SEC Files Lawsuit Against Coinbase, Leading to 12% Stock Drop, Over Exchange and Staking Programs

The Securities and Exchange Commission (SEC) has taken legal action against cryptocurrency exchange Coinbase, filing a lawsuit in a New York federal court. The SEC alleges that Coinbase has been operating as an unregistered broker and exchange, violating securities laws. The regulatory body is seeking a permanent restraining order to prevent Coinbase from continuing these activities. This legal action comes on the heels of the SEC’s recent lawsuit against Binance and its founder, Changpeng Zhao.

Coinbase’s stock experienced a significant drop of 12% following the announcement of the SEC lawsuit. The stock had already fallen by 9% the previous day when the SEC unveiled charges against rival exchange Binance. SEC Chair Gary Gensler highlighted the multifaceted nature of these trading platforms, stating that they combine various functions. He drew a comparison by mentioning that the New York Stock Exchange does not engage in hedge fund activities.

The SEC’s complaint against Coinbase focuses on the exchange’s flagship prime brokerage, exchange, and staking programs, which the regulator claims violate securities laws. The complaint alleges that Coinbase has evaded the disclosure requirements and regulatory structures outlined by U.S. securities law for years. According to the SEC, at least 13 crypto assets listed on Coinbase are considered “crypto asset securities.” Among them is Solana’s SOL token.

Gensler emphasized that Coinbase, despite being subject to securities laws, has unlawfully commingled and offered exchange, broker-dealer, and clearinghouse functions. In response to the SEC’s enforcement-centric approach, Coinbase’s Chief Legal Officer, Paul Grewal, stated that it is harming America’s economic competitiveness and companies like Coinbase, which prioritize compliance. Grewal advocated for transparent legislation that would establish fair rules for the digital asset industry.

The SEC also targeted Coinbase’s staking program, classifying it as an investment contract and unregistered security. This move echoes a similar action taken by the SEC against crypto exchange Kraken’s staking service. The SEC describes Coinbase’s staking program as a means for investors to earn financial returns through the platform’s managerial efforts. However, Coinbase is expected to challenge the SEC’s assessment, as it believes the staked assets should not be classified as securities.

Coinbase had previously received a Wells notice from the SEC earlier this year, indicating the impending SEC action. The company had vehemently defended its offerings, engaging in public disputes with the regulator and preparing for potential legal action through advertising campaigns and publicity. Many in the crypto community viewed Coinbase as the only entity with the resources and institutional standing to challenge the SEC and Gensler. The company has positioned itself as a regulated and secure option compared to other exchanges.

Ironically, the SEC cited Coinbase’s advertising efforts as evidence against the exchange. The regulators noted that Coinbase spends hundreds of millions of dollars annually on marketing and sales to attract and retain investors. Solicitation is one of the factors the SEC considers when determining whether a company is operating as a broker or an exchange.

In addition to the solicitation, the SEC employs the “Howey test” to determine whether an asset qualifies as an investment contract and, consequently, a security. According to this test, an asset is classified as a security if it involves investment in a common enterprise, with the expectation of returns, through the efforts of others.

Fun and Interesting Fact: In 2019, Coinbase acquired a company called Neutrino, which specialized in blockchain analytics. However, controversy arose when it was revealed that several Neutrino employees had previously worked for a company called Hacking Team, known for selling surveillance tools to governments with questionable human rights records. The acquisition sparked outrage within the crypto community, leading to a #DeleteCoinbase movement on social media

Disclaimer: This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments. This is a news article only. 

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