First Binance, Now Coinbase. Earlier today, the SEC filed a lawsuit alleging that Coinbase engaged in activities as a broker, national securities exchange, and clearing agency without obtaining the necessary registration from the SEC.
Today really hasn’t been a great day for Coinbase. So far, the San Francisco-based company is already being sued by the U.S. Securities and Exchange Commission (SEC), facing scrutiny from ten U.S. state securities regulators over its staking program, and those very developments have led to a decline of almost 14% in Coinbase's stock during early trading. That’s quite a list of challenges for a Tuesday, and the day isn’t over yet.
The Securities and Exchange Commission (SEC) has alleged in its complaint that Coinbase violated U.S. securities laws by engaging in activities as an unregistered exchange, broker-dealer, and clearing agency. It also addressed the platform's staking program, contending that it resembles an unregistered security and investment contract and that the program enables investors to earn financial returns based on the managerial efforts of Coinbase.
These allegations suggest that Coinbase failed to comply with the necessary regulatory requirements set forth by the SEC for operating in these capacities.
"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” - Gary Gensler, SEC Chair
The SEC's complaint further alleges that Coinbase sought to increase its profits by expanding its listing of crypto assets with at least 13 assets that the SEC identified as securities. Suggesting that the platform went as far as advising certain issuers to remove potentially problematic language from their asset descriptions, even though Coinbase was aware of the risk that these assets could be considered securities. This suggests that Coinbase may have knowingly allowed the trading of assets that were being offered and sold as securities on its platform.
Not The Only Lawsuit
It’s also worth noting that Coinbase facing a lawsuit from the SEC is not an isolated incident, with the U.S. SEC filing a 136-page complaint just yesterday with a total of 13 charges against Binance and its founder, Changpeng Zhao. In Binance’s case, the SEC alleged that Binance Holdings Ltd., BAM Trading Services Inc., and founder Changpeng Zhao not only broke U.S. securities laws, but also accused Binance of commingling of customer funds with an outside entity controlled by Zhao, known as Merit Peak Limited, and wash trading on the Binance.US platform.
In a noteworthy piece of evidence presented in the lawsuit, the Chief Compliance Officer of Binance allegedly messaged a colleague saying, “We are operating as a fking unlicensed securities exchange in the USA bro.”, and in another instance also said, “We do not want [Binance].com to be regulated ever.”
These statements, as presented in the lawsuit, not only suggest awareness of the regulatory violations but also a deliberate intention to operate outside regulatory boundaries and resist compliance efforts.
Regulatory Changes Ahead
While the recent lawsuits currently have the market in turmoil, the mounting regulatory scrutiny and pile of lawsuits from the SEC underscore the regulatory agency's ongoing commitment to effectively regulate the cryptocurrency industry. However, while the SEC may say that its actions are in the best interest of investors, it’s clear to see that the U.S. is increasingly getting stuck in what amounts to a regulatory tug-of-war. And as the regulatory climate continues to heat up in the U.S., the strained relationship between crypto and the SEC could lead to innovation slowing down in the sector.