SEC sues Coinbase in its crusade against cryptocurrency firms

The U.S. agency accused the platform of operating an unregistered securities platform and brokerage service. The lawsuit comes a day after charges were filed against Binance, the world’s largest crypto exchange

A Coinbase ad in Times Square in New York.
A Coinbase ad in Times Square in New York.Shannon Stapleton (REUTERS)

The United States continues its crusade against cryptocurrency firms, which for years have been taking advantage of legal loopholes to operate, sometimes even in direct violations of rules. The Securities and Exchange Commission (SEC) has decided to take action and charge some of the largest firms in the sector. The SEC sued Binance — the world’s largest crypto exchange — on Tuesday, and on Wednesday filed charges against Coinbase, the crypto leader in the United States, which had already been fined by authorities previously. The U.S. agency accused Coinbase of operating an unregistered securities platform and brokerage service.

Coinbase shares fell sharply on the stock market before the official market opening, by around 15%. Bitcoin was also trading lower again. Coinbase is the largest crypto asset trading platform in the United States and has serviced over 108 million customers, accounting for billions of dollars in daily trading volume in hundreds of crypto assets, according to the SEC.

The SEC has for years allowed cryptocurrency platforms like FTX or Coinbase to operate in plain sight without taking any action. Now, the agency claims that these companies were breaking the law, but a firm doesn’t get to 108 million customers on the sly. It’s clear that after the bankruptcy of FTX and the discovery of the gigantic fraud that its founder, Sam Bankman-Fried, and his associates had allegedly been committing, regulators have raised the bar when it comes to scrutinizing the crypto sector.

According to the SEC’s 101-page lawsuit, Coinbase has, since at least 2019, made billions of dollars by illegally facilitating the purchase and sale of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker and clearing agency without having registered any of those functions with the Commission, as is required by law.

According to the regulator, Coinbase’s failure to register deprived investors of important protections, including supervisory inspection, record-keeping requirements and safeguards against conflicts of interest, among others.

Return the money

In this case, unlike Binance, the company is not accused of siphoning off billions of dollars, but of earning them illegally through commissions. The SEC is asking the judge to prevent the platform from continuing to operate illegally, as well as the individuals responsible. The SEC also proposes in its complaint that Coinbase be ordered to repay all profits earned through its violations of securities laws, with interest for late payment, and that fines be imposed on the firm for its violations.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As alleged in our complaint, 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 by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”

Before the SEC’s lawsuit, the cryptocurrency platform had already reached an agreement to pay a $50 million fine to the State of New York for significant failures in its regulatory compliance program, which violated state banking law and regulations on virtual currencies, money transmitters, transaction oversight and cybersecurity.

The settlement was made public in January by the New York State Department of Financial Services (DFS). According to the DFS, these failures made the Coinbase platform vulnerable to serious criminal conduct, including, but not limited to, fraud, potential money laundering, suspected activity related to child sexual abuse material and possible narcotics trafficking. In addition to the sanction, Coinbase agreed to invest an additional $50 million over the next two years to remediate the issues and enhance its regulatory compliance program in accordance with a plan approved by the DFS. Coinbase warned in its last annual report that an investigation was underway.

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