The SEC seems to be on a mission to sue the crypto industry. After filing a lawsuit against Binance, which is the largest exchange platform in the crypto space, the Securities Exchange Commission has filed another lawsuit against another crypto exchange platform. This time, it is Coinbase, the largest U.S. exchange of the crypto market. This lawsuit has led to Coinbase’s stock price dropping 20% in premarket trading. Why is the SEC suing Coinbase?
The SEC sued Coinbase on Tuesday, June 6, 2023, alleging that the company was operating as an unregistered exchange and broker, and that 13 assets listed on its platform were considered crypto asset securities. The regulator asked that the exchange be “permanently restrained and enjoined” from doing so. Prior to the lawsuit, Coinbase stock plunged 9% on Monday following the lawsuit against Binance.
In filing the lawsuit, SEC boss, Gary Gensler stated: “These trading platforms, they call themselves exchanges, are commingling a number of functions. We don’t see the New York Stock Exchange operating a hedge fund.” The SEC said that Coinbase operated as an unregistered broker through Coinbase Prime, which routes orders to Coinbase’s platform and other platforms, and Coinbase Wallet, which lets investors access liquidity outside Coinbase’s platform.
Gensler further stated in a tweet: “Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspections.” The SEC has alleged that at least 13 crypto assets available to Coinbase customers were considered “crypto asset securities” by the regulator. Those assets include Solana’s token, Cardano’s token, and Protocol Lab’s Filecoin token. Coinbase did not immediately respond to the allegations. Coinbase’s institutional service, Prime, its retail exchange product, and its self-custody Wallet service all offered one or more crypto asset security, the SEC alleged in its complaint.
The exchange had already received a Wells notice from the regulator earlier this year, a letter notifying a company when SEC action is pending. Coinbase had mounted a vigorous defense of its offerings, publicly litigating with the regulator and preparing for potential action with advertising campaigns and publicity. The company has been identified by many in the crypto community as the only entity with the financial and institutional resources to go toe-to-toe with the SEC. The company has a sophisticated presence and has advertised itself for years as a safer, regulated option compared to other exchanges.
Who will be next after Binance and Coinbase? The SEC seems to crackdown any crypto exchange that it believes does not comply with federal guidelines. The Howey Security Test, which is the measurement that the SEC relies on to determine what qualifies as an investment contract, is the tool it uses to make crypto exchanges comply with securities laws. The implications of the Howey test for cryptocurrency are significant, as the test provides a framework for determining whether a particular cryptocurrency offering should be classified as a security under U.S. law. If a cryptocurrency offering meets the criteria outlined in the Howey test, it may be considered a security and subject to federal securities laws. This has important ramifications for crypto businesses and investors since breaking federal securities laws can result in penalties, legal action and reputational harm to the business. To make sure they are in compliance with federal securities laws, cryptocurrency companies should carefully consider the Howey test before creating their offerings.