The Securities and Exchange Commission (SEC) is on a tear this week.
After a brutal crypto winter, the summer of 2023 isn’t shaping up to be any better or more forgiving of a season for the crypto industry as regulators clamp down on two of the digital asset sector’s most visible actors.
The agency filed 13 charges Monday (June 5) against the world’s largest crypto exchange, Binance, and its founder, Changpeng Zhao, alleging a variety of securities law violations and claiming the platform “engaged in an extensive web of deception.”
Not even 24 hours later, in New York federal court Tuesday morning (June 6), the regulator separately sued U.S.-based and publicly listed crypto exchange Coinbase, a Binance peer, claiming that the platform had been letting its own users trade unregistered securities.
The SEC charged Coinbase, as well as its parent company, with operating as an unregistered national securities exchange, broker and clearing agency. It also took aim at Coinbase’s failure to register the offer and sale of its crypto asset Staking-as-a-Service program with the agency.
An SEC case against Coinbase has been expected ever since the exchange disclosed it had received a “Wells notice” from the agency in March.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones…,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement. “…Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors.”
The agency’s 101-page complaint demanded that the company be “permanently restrained and enjoined” from continuing to act as an unregistered broker and exchange.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Coinbase Chief Legal Officer and General Counsel Paul Grewal said in response to PYMNTS’ request for comment. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
Coinbase’s stock is trading down on the news of the SEC’s enforcement action, continuing an ongoing slide kicked off by the Binance news.
Unfortunately for crypto firms looking to operate in the U.S., the long-standing argument that cryptocurrencies and digital assets should not be viewed as securities under federal laws continues to largely fall on deaf ears at the SEC — and may soon be clarified in court.
“Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors,” the agency’s court filing stated.
The federal complaint added: “Coinbase has for years touted its efforts to analyze crypto assets under the standards set forth in Howey before making them available for trading. But while paying lip service to its desire to comply with applicable laws, Coinbase has for years made available for trading crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities law.”
In advance of the SEC complaint, Coinbase had mounted a robust defense of its crypto offerings, publicly litigating with the securities agency and preparing for the enforcement with a national publicity campaign dubbed “Crypto: Moving America Forward.”
“We are 100% committed to the U.S. because rule of law prevails here,” Coinbase CEO Brian Armstrong told investors during the company’s most recent earnings call, emphasizing that it is “really important for America to get this [crypto regulation] right.”
The SEC claimed in its lawsuit that the tokens powering the Solana, Cardano, Polygon, Filecoin, The Sandbox, Axie Infinity, Chiliz, Flow, Internet Computer, Near Protocol, Voyager, Dash and Nexo blockchains all represent securities. Both Binance and Coinbase offer the tokens on their platforms.
Among those tokens, Solana, Cardano, Polygon, The Sandbox and Axie Infinity have been approved for trading by the Hong Kong government’s just-enacted crypto rules.
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