NEW YORK, June 6 (Reuters) – The top U.S. securities regulator sued cryptocurrency platform Coinbase on Tuesday, the second case in two days against a major crypto exchange. A market that operates largely outside of regulation.
The US Securities and Exchange Commission on Monday took aim at Binance, the world’s largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of running a “web of fraud.”
If successful, the lawsuits could reshape the crypto market, successfully asserting the SEC’s jurisdiction over the industry, which has argued for years that tokens are not securities and should not be regulated by the SEC.
“The two cases are different, but overlap and point in the same direction: the SEC’s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of federal securities laws,” said Kevin O’Brien, a partner at Ford O’Brien Lundy. The former federal prosecutor said the SEC had never taken on major crypto players like this before.
“If the SEC succeeds in both, the cryptocurrency industry will be transformed.”
In a complaint filed in Manhattan federal court, the SEC said Coinbase has made billions of dollars acting as an intermediary in crypto transactions since at least 2019, while avoiding disclosure requirements to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that must be registered securities, including tokens such as Solana, Cardano and Polygon.
Coinbase suffered about $1.28 billion in net customer outflows following the lawsuit, according to preliminary estimates from data firm Nansen. Shares of Coinbase’s parent company, Coinbase Global Inc, fell $7.10, or 12.1%, to $51.61, down 20.9% from earlier. They are up 46% this year.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as usual and has “demonstrated a commitment to compliance.”
Broker, Exchange Crackdown
Bonds, unlike other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined the definition of the term “security,” although many experts rely on two U.S. Supreme Court cases that an investment product constitutes a security.
SEC Chairman Gary Gensler has long asserted his authority over the crypto market, initially focusing on the creation of token bonds and the sale of tokens and interest-bearing crypto products. More recently, it has targeted unregistered crypto broker-dealers, exchange trading and settlement activity.
Although a few crypto companies are licensed as alternative trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform functions as a full-fledged stock exchange. The SEC sued Beaxy Digital and Bittrex Global this year for failing to register as an exchange, clearing house and broker.
“The entire business model is built on non-compliance with US securities laws, and we’re asking them to comply,” Gensler told CNBC.
Crypto firms deny that tokens meet the definition of a security, saying the SEC’s rules are vague and that it oversteps its authority in trying to regulate them. However, many companies have increased compliance, discontinued products and expanded outside the country in response to the crackdown.
Christine Smith, CEO of the Blockchain Association trade group, dismissed Gensler’s efforts to oversee the industry.
“We hope the courts will prove Chairman Gensler wrong in due course,” he said.
Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion in customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion in net revenue last year.
The SEC’s filing on Tuesday seeks civil penalties, ill-gotten gains and injunctive relief.
On Monday, the SEC accused Binance of inflated trading volumes, diverted client funds, improperly pooled assets, failed to keep wealthy US clients off its platform and misled clients about its regulations.
Finance promised It was aggressive in defending itself against the lawsuit, which it said reflected the SEC’s “wrongful and conscious refusal” to provide clarity to the crypto industry.
Customers received about $790 million from Binance and its U.S. subsidiary following the lawsuit, Nansen said.
On Tuesday, the SEC filed a request to freeze assets owned by Binance.US.
Reporting by Jonathan Stempel in New York and Hannah Long and Michael Price in Washington; Editing by Lisa Shumaker and Leslie Adler
Our Standards: Thomson Reuters Trust Principles.
Hannah Long covers financial technology and cryptocurrency, including the businesses that drive the industry and the policy developments that govern the sector. Hannah previously worked at American Banker, where she covered banking regulation and the Federal Reserve. He graduated from the University of Maryland, lives in College Park and Washington, DC.