The U.S. Securities and Exchange Commission filed a lawsuit on Tuesday Coinbaseaccuses the greatest American cryptocurrency Platform operating illegally because it could not register as an exchange, another blow to the crypto industry.
The lawsuit is that SECs Second in two days against a major crypto exchange after their lawsuit against it binancethe world’s largest cryptocurrency exchange, and founder Changpeng Zhao.
Both civil cases are part of SEC Chairman Gary Gensler’s efforts to enforce jurisdiction over the crypto industry, which he again on Tuesday called “the Wild West” and eroded investor confidence in U.S. capital markets.
“The entire business model is based on non-compliance with US securities laws and we urge them to comply,” Gensler told CNBC.
Crypto companies say the SEC’s rules are unclear and the agency is going too far in trying to regulate them.
According to initial estimates by data firm Nansen, Coinbase suffered a net outflow of customers of around US$1.28 billion (approximately Rs.10,564 billion) after the lawsuit.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as normal and is “committed to compliance.”
Ten U.S. states, led by California, also accused Coinbase of violating securities laws related to its staking rewards program on Tuesday.
Shares in Coinbase parent company Coinbase Global ended down $7.10 (about Rs.586), or 12.1 percent, at $51.61 (about Rs.4,260), after earlier falling by as much as 20.9 percent had fallen. They’re up 46 percent this year.
“Rules must not be ignored”
In its complaint filed in Manhattan federal court, the SEC said Coinbase has made billions of dollars since at least 2019 by acting as an intermediary in crypto transactions while evading disclosure requirements designed to protect investors.
The SEC said Coinbase has traded at least 13 crypto assets, which are securities that should have been registered, including tokens such as Solana, Cardano And polygon.
Founded in 2012, Coinbase recently served more than 108 million customers. At the end of March, Coinbase had $130 billion (approximately 10.73.016 crore) in crypto assets and customer funds on its balance sheet. Transactions generated 75 percent of the US$3.15 billion (approximately Rs.25,998 crore) in net sales last year.
In the Staking Rewards program, which has around 3.5 million customers, Coinbase pools crypto assets and uses them to support activities on the blockchain network in exchange for “rewards” it gives to its customers after earning a commission received for himself.
The SEC’s lawsuit seeks civil penalties, recovery of ill-gotten gains and an injunction. The SEC warned Coinbase in March that it could face indictments.
“You just can’t ignore the rules because you don’t like them,” Gurbir Grewal, the SEC’s law enforcement chief, who is not related to Paul Grewal, said in a statement.
Also among the states reviewing the staking rewards program are Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase US$5 million (approximately Rs.41.2 million) for selling unregistered securities.
Coinbase said it expects “productive talks” with states and is confident its staking services are non-securities.
Resisting SEC action
Gensler’s crackdown on cryptocurrencies has prompted the industry to improve compliance, put products on hold, and expand overseas.
Kristin Smith, CEO of trade group Blockchain Association, dismissed Gensler’s efforts to oversee the industry.
“We are confident that in time the courts will prove Chairman Gensler wrong,” she said.
On Monday, the SEC accused Binance of increasing trading volume, diverting customer funds, unlawfully merging assets, failing to keep high-net-worth US customers off the platform, and misleading customers about its controls.
Binance vowed to vigorously defend itself against the lawsuit, which it says reflects the SEC’s “misguided and willful refusal” to provide clarity to the crypto industry.
Nansen said customers withdrew about $790 million (about 6,520 crore) from Binance and its US subsidiary following the lawsuit.
On Tuesday, the SEC filed a request to freeze US assets in the Binance case.
Tensions between Coinbase and Gensler date back to 2021, when the SEC threatened a lawsuit if Coinbase allowed its users to earn interest by lending digital assets. The company scrapped the idea.
Tuesday’s case is SEC v. Coinbase Inc et al., U.S. District Court, Southern District of New York, No. 23-04738.
© Thomson Reuters 2023
