SEC Sues Coinbase, Accuses Crypto Platform of Breaking Market Rules

The Securities and Exchange Commission sued Coinbase, the largest cryptocurrency trading platform in the United States, on Tuesday, claiming that the company broke securities law by not registering as a broker.

The nation’s top securities regulators filed the lawsuit a day after it sued Binance, the world’s biggest cryptocurrency trading exchange, for mishandling customer funds and lying to American regulators and investors about its operations.

The regulator’s actions against the two major crypto companies reflected a broad effort to end what U.S. authorities see as the era of lawlessness in the industry. With these and other lawsuits, the S.E.C. has sought to reshape the crypto sector by grouping digital asset exchanges with more traditional financial firms, like securities dealers, while pushing out individuals and companies it views as bad actors.

In Tuesday’s filing, the S.E.C. detailed the ways in which Coinbase’s leaders had demonstrated that they knew how the marketing and sale of digital assets should be governed under U.S. laws, even while failing to follow them.

“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,” the filing said.

The complaint, which was filed in a Manhattan federal court, claims that Coinbase operated as an unregistered exchange even though it told investors in going public that there were risks in how it was operating and that some of the products traded on its platform might be deemed to be securities by regulators.

The S.E.C. said Coinbase has made billions facilitating the sale of crypto assets as an unregistered exchange, but deprived investors of significant protections.

“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,” Gurbir S. Grewal, the director of the S.E.C.’s enforcement division, said in a statement.

The action is consistent with the S.E.C.’s long-held view that most crypto products are no different from stocks, bonds and other securities and must comply with U.S. laws. That means the firms that operate as exchanges and provide a platform for trading and selling crypto products must be registered like any exchange or brokerage that facilitates stock or bond trading.

“The S.E.C.’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness,” said Coinbase’s chief legal officer, Paul Grewal (no relation to the S.E.C. enforcement director), in a statement about the suit. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation,” he added.

Executives in the crypto industry, which has reveled in challenging the rules and operating outside the heavily regulated confines of the mainstream finance industry, have often argued that digital assets are different and many of the strict regulatory rules for stocks should not apply.

“The message here is that regulatory clarity already exists when it comes to exchanges and broker dealers,” said John Reed Stark, a former S.E.C. enforcement attorney and regulatory consultant.

The suit against Coinbase touched on a crucial issue that many in the crypto industry have said must be addressed by Congress.

The S.E.C. has said the test to determine whether a crypto product should be treated like a security is derived from a 1946 Supreme Court case that led to what is known as the Howey test. The S.E.C. chair Gary Gensler has often said that this standard is clear and no new laws are needed to determine whether a digital asset is a security. The industry, however, has begged to differ.

The S.E.C. complaint took issue with Coinbase’s claims that it was fully compliant with applicable securities laws before offering new digital products for trading, dismissing them as “lip service.”

According to the 101-page complaint, “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.”

The suit against Coinbase, long anticipated by the company, comes as its executives and others in the crypto industry are hoping to shift the narrative about digital assets. Mr. Grewal of Coinbase is slated to testify before a House committee on Tuesday about a draft bill regulating crypto. Coinbase has said that it welcomes regulation, and wants to cooperate with the S.E.C.

The S.E.C. lawsuit is the latest in a multiyear crackdown on the crypto market by the regulator, which has picked up steam following the collapse of the FTX crypto currency exchange in November and criminal charges against its founder, Sam Bankman-Fried.

The lawsuit against Coinbase notably did not include an allegation of fraud, like the complaint against Binance. The S.E.C. on Monday also sued Binance’s founder and chief executive officer, Changpeng Zhao. On Tuesday, it did not similarly sue Coinbase’s chief executive, Brian Armstrong.

Coinbase, unlike Binance, does not issue its own crypto tokens, and the company has argued that its status as a publicly listed company ensured that it followed strict rules about its operations.

The company petitioned the S.E.C. for new rules last summer and even sued the agency for failing to act on its request in April.

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