The Securities and Exchange Commission unveiled a lawsuit against Coinbase, one of the largest and best-known cryptocurrency exchanges based in the U.S., on Tuesday. Coinbase shares slipped 20 percent in premarket trading on the news.
The lawsuit alleges that Coinbase “merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies,” but has never registered as any of these things, violating securities law. This let Coinbase evade the U.S.’s disclosure regime for securities, and “exposed [customers] to significant risk” while collecting billions in revenue from trading fees. The lawsuit seeks for Coinbase to be “permanently restrained and enjoined.”
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While a Coinbase listing was once seen as a gold stamp of approval for a cryptocurrency, in recent years the company has sped up its process in an effort to bring in buzzy coins and more revenue. “We’re going to have to do this in the future–be the first to list a number of these coins,” CEO Brian Armstrong said in 2021. Shortly after, the company listed Dogecoin.
According to the SEC, “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 laws.”
“As such, Coinbase has elevated its interest in increasing its profits over investors’ interests, and over compliance with the law and the regulatory framework that governs the securities markets and was created to protect investors and the U.S. capital markets,” it continued.
The lawsuit comes just one day after the agency filed a lawsuit against Binance, Coinbase’s biggest competitor, for operating an unregistered exchange and commingling customer funds.
Coinbase has publicly sparred with the SEC for years. In 2021, the SEC threatened to sue the exchange if it launched a lending program, which the regulator argued would involve a security. Coinbase made a fiery response at the time, denying that its product would be a security. In March of this year, the SEC served Coinbase with a “Wells notice”—a notice of securities law violation but not an enforcement action in itself—alleging that some of the assets it lists as well as a handful of programs (Coinbase Earn, Coinbase Prime, and Coinbase Wallet), all violated U.S. securities law.
The company said at the time that the SEC was not being “fair or reasonable” and told customers: “Rest assured, Coinbase products and services continue to operate as usual—today’s news does not require any changes to our current products or services.”
In a statement, Coinbase said that it will continue operating as usual.
“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,” Paul Grewal, Coinbase’s Chief Legal Officer and General Counsel, said in a statement. “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.”
Update: This story was updated with comment from Paul Grewal, Coinbase’s Chief Legal Officer and General Counsel.
