Coinbase Girds for the ‘Defining Case of Crypto Era’

SEC Alleges Coinbase Is Violating US Securities Laws

By: Aleksandar Gilbert Loading...

Coinbase Girds for the ‘Defining Case of Crypto Era’

Coinbase, the United States’ largest crypto exchange, is preparing for a legal battle with the country’s top financial watchdog.

Staff at the Securities and Exchange Commission believe Coinbase is in violation of U.S. securities laws, according to a copy of a Wells Notice the company shared on social media. The notice is not a formal lawsuit but typically precedes one.

An SEC lawsuit could kick off a legal battle with little precedent in the fledgling industry. It could also settle, once and for all, a question that has tormented crypto: whether all digital assets except Bitcoin as unregistered securities. If the SEC were to sue Coinbase on the grounds that most assets listed there are unregistered securities, a ruling could settle the question, according to former SEC attorney Marc Fagel.

While the case being fought by digital payments network Ripple is closer to a resolution, Fagel said, “what may come out of Coinbase could [make it] the defining case of the crypto era.”

Welcome Opportunity

The notice has no effect on Coinbase products or services, Coinbase Chief Counsel Paul Grewal wrote in a blog post Wednesday.

Grewal and Coinbase CEO Brian Armstrong both said they welcome the opportunity to defend the company’s approach to crypto asset listings in court.

“Going forward, the legal process will provide an open and public forum before an unbiased body where we will be able to make clear for all to see that the SEC simply has not been fair, reasonable, or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets,” Armstrong wrote on Twitter.

Coinbase stock fell more than 15% in after-hours trading Wednesday.

Justin Sun Sued

In a separate action Wednesday, the SEC sued Justin Sun, the founder of the Tron blockchain, for selling unregistered securities and for market manipulation.

Both actions come on the heels of a White House report authored by the Biden Administration’s top economic advisors, who argue that digital assets and blockchain technology have little value beyond creating artificial scarcity and fomenting market volatility.

White House Report Calls For Greater Oversight of Web3

White House Report Calls For Greater Oversight of Web3

Slams Crypto As Speculative and Ineffective

The Defiant The Defiant

Crypto businesses in the U.S. allege the administration is attempting to kill the industry by severing its access to traditional banks. In an effort to prove those allegations, the Blockchain Association, an industry lobbyist, recently sent open records requests to the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

Coinbase Wells Notice

A Wells Notice almost always precedes a lawsuit, according to Fagel. But it also starts a conversation.

“Wells is an iterative process,” he said. “A lot can change in terms of the scope of the case.”

Coinbase believes the SEC has taken issue with “an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet,” Grewal wrote. “The bottom line remains: Coinbase does not list securities or offer products to our customers that are securities.”

Existential Question

Whether crypto assets are commodities or securities is an existential question for the industry. Securities are subject to strict and expensive oversight. The cost of compliance can drown a nascent company, if they’re able to get the appropriate approvals at all.

But confusion reigns. The head of the Commodity Futures Trading Commission has called Ether a security, for example. Gensler seems to think otherwise. Congress has yet to settle the matter with legislation.

Coinbase claims the SEC has ignored its efforts to create a framework for digital assets.

“We developed and proposed two different registration models,” Grewal wrote. “We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none.”

Failed to Raise Issues

Coinbase also claims the SEC failed to raise any issues with its staking service when the company went public in 2021, Grewal continued. Nor did the SEC raise issues with assets listed on Coinbase over the course of 30 meetings.

“Tell us the rules, and we will follow them,” Grewal wrote. “Give us an actual path to register, and we will register the parts of our business that need registering.”

A resolution to any potential lawsuit could take years, Fagel said. But some clarity regarding the status of crypto assets is just around the corner.

Justin Sun Lawsuit

On Wednesday, the SEC sued crypto mogul Justin Sun and three companies he owns — Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. — along with eight celebrities who shilled tokens on Sun’s behalf without disclosing their ties to him.

Sun founded the Tron blockchain. He reportedly acquired crypto exchange Huobi last October.

The SEC has accused Sun and his companies of selling a pair of unregistered securities: crypto tokens Tronix (TRX) and BitTorrent (BTT). The Commission also accused him of manipulating crypto markets “through extensive wash trading.”

Celebrity Endorsements

It also accused Lindsay Lohan, Jake Paul, Soulja Boy, Akon and four other celebrities of promoting TRX or BTT without disclosing that Sun and his companies had paid them to do so.

“This is the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a prepared statement.

Six of the eight celebrities settled with the SEC and together paid more than $400,000 in fines without denying or admitting guilt.