The battle between crypto exchange Coinbase and the U.S. Securities and Exchange Commission (SEC) has intensified, with Coinbase accusing the regulator of making decisions about alleged legal violations “on the fly”. The accusations were made in response to a Wells Notice, a formal warning from the SEC that the Enforcement Division found sufficient evidence of lawbreaking that it may recommend a lawsuit against the exchange.
Coinbase’s response to the SEC’s warning is centered on the idea that cryptocurrencies listed on the exchange are not securities, which is in stark contrast to the claims made by SEC Chair Gary Gensler, who has repeatedly stated that most digital assets meet the standards of a security under federal law. The SEC claims that Coinbase’s staking service, Prime and Wallet products, and its general listing process may all violate federal securities law.
In a video released earlier this month, Gensler reiterated his view that crypto intermediaries must register as regulated entities in the U.S. He argued that intermediaries for investment contracts, such as exchanges, brokers, dealers, and clearinghouses, must comply with securities laws and register with the SEC. However, Coinbase argued that the SEC does not have the authority to demand that the exchange agrees that virtually all digital assets listed on its platform are securities or overhaul its entire business model to register as a national securities exchange and clearing agency.
Coinbase has already obtained both a broker-dealer and alternative trading system (ATS) but requires approval from the SEC and Financial Industry Regulatory Authority (FINRA) to operate them. The exchange has 45 money transmitter licenses, a New York BitLicense, and a designated contract market.
The exchange has also asked the SEC a number of questions, including those about its asset listing process, the Wallet product, and its staking services. Coinbase claims that it provided information in response to SEC staff questions about these products, but “the staff raised no concerns during” meetings about the products.
According to Coinbase, the SEC has shifted its position on what assets qualify as securities, and the exchange has requested further rulemaking from the regulator to clarify how it sees digital assets as securities.
“We're fully preparing for litigation, just to be very clear, and have been doing so for some time. I always remain optimistic that cooler heads will prevail, but you should not be under any illusion that we are holding out any hope that somehow the SEC will change its mind,” said General Counsel Paul Grewal.
The exchange also argued that it did not receive “fair notice” from the regulator about the enforcement action, stating repeatedly in the document that “one media statement by a member of the Commission is not policy guidance.”
The benefit of a Wells response is that the five SEC commissioners will have both the Enforcement Division’s argument and the company’s response when they decide how to vote. Any SEC enforcement action will need a majority of the five commissioners to vote in favor.
The accusations made by Coinbase come as the SEC tightens its grip on the cryptocurrency industry. In recent months, the regulator has issued warnings to crypto firms and launched investigations into several companies, including Binance, the world's largest cryptocurrency exchange by trading volume. The SEC has also delayed its decision on approving a bitcoin exchange-traded fund (ETF).
The increasing regulatory scrutiny of the crypto industry reflects growing concerns over the risks associated with cryptocurrencies. Critics argue that cryptocurrencies are unregulated and volatile, making them an easy target for fraudsters and scammers. However, supporters of cryptocurrencies argue that they are a vital tool for financial inclusion and innovation.
The outcome of the battle between Coinbase and the SEC is likely to have significant implications for the crypto industry. If the SEC succeeds in its enforcement action against Coinbase, it could set a precedent for other exchanges and crypto firms. On the other hand, if Coinbase prevails, it could be seen as a victory for the crypto industry and provide some regulatory clarity.
Regardless of the outcome, it's important to note that the regulatory landscape for the crypto industry is still developing and evolving. Many countries are still figuring out how to regulate and classify cryptocurrencies, and the rules and regulations are often different depending on the jurisdiction.
In the United States, the SEC has taken a more cautious approach towards cryptocurrencies, particularly with regards to initial coin offerings (ICOs) and the classification of certain cryptocurrencies as securities. This has resulted in a number of enforcement actions against crypto firms and exchanges in recent years.
However, there have also been some positive developments in the US regulatory landscape for cryptocurrencies. For example, the Office of the Comptroller of the Currency (OCC) recently issued a letter stating that banks can now offer crypto custody services to their customers.
Overall, it's clear that the crypto industry is still in the process of navigating a complex regulatory environment. The outcome of the Coinbase-SEC battle will be an important data point, but it's only one piece of a larger puzzle.
