Coinbase accused of illegal operation by US watchdog

The top American market regulator is suing Coinbase – the largest cryptocurrency trading platform in the country – claiming that the company has been operating illegally and without registration with the regulator.

The Securities and Exchange Commission (SEC), accused Coinbase for “commingling and unlawfully offering” exchange, brokerage and clearing house services. Shares of the company fell by 12.1%, or $7.10 to $51.61 last night in New York.

According to the regulator, Coinbase has illegally made billions by facilitating the sale and purchase of crypto assets securities since at least 2019. In response, the company stated that SEC’s crypto policy was harming America’s competition and promised to continue with “business as usual.”

The agency has taken legal action twice in the last few days against one of the leading players in the crypto industry. The agency has sued Binance, claiming that the platform had mixed up customers’ funds in an illegal exchange and was operating in the United States. Binance has pledged to “vigorously” defend its platform.

The SEC filed a complaint with the US District Court for Southern District of New York arguing that Coinbase’s operations combine three traditional market functions – that of a brokerage, exchange and clearing agency – but claimed that the company was never registered to offer such services.

Paul Grewal, Chief Legal Officer and General Counsel at Coinbase said: “The SEC’s reliance on a enforcement-only approach, in the absence clear rules for digital assets industry, is hurting America’s economic competitiveness, and companies like Coinbase who have demonstrated a commitment to compliance.”

The solution, and not litigation, is legislation which allows for fair road rules to be developed in a transparent manner and then applied equally. We’ll keep doing business as usual in the interim.

The lawsuit puts more pressure on the company. It went public in New York two years ago, via an astonishing direct listing that was hailed as being a breakthrough in cryptocurrencies. This briefly pushed its valuation to $100 billion. The stock price has fallen sharply since then, but the crypto boom faded and volatility-plagued assets like Bitcoin, along with operators in the industry, such as FTX, have collapsed. Coinbase’s current value is $11 billion.

Gary Gensler is the chairman of the SEC. He said: “We claim that Coinbase despite being subjected to securities laws, unlawfully offered exchange functions, broker-dealer functions, and clearinghouse functions. These functions are separated in other parts of the securities market.

“Coinbase’s alleged failures deny investors critical protections including rulebooks to prevent fraud and manipulation. Proper disclosure, safeguards for conflicts of interest and routine inspections by the SEC.”

Gurbir Grewal who heads the regulator’s enforcement department, claimed that Coinbase was “fully aware” of federal securities laws that applied to their business activities but “deliberately declined” to comply. He said that you cannot ignore rules just because you dislike them or would prefer a different set of rules. The consequences to the investing public will be far too severe if you do.

Grewal said: “Coinbase’s calculated decision may have enabled it to earn billions but it has done so at investors’ expense by denying them the protections they are entitled to.”

Brian Armstrong, CEO of Coinbase, stated that the SEC reviewed Coinbase’s business before it became public in 2021. We tried repeatedly to register, but there is no way. So we do not list securities,” wrote Armstrong on Twitter. “We reject the majority of assets that we review.”

He added that the action taken against Coinbase was “very different” from those taken against other operators. The SEC, instead of releasing a rule book that was clear and concise, has adopted a regulatory by enforcement strategy which is harmful to America. If we have to use the courts to obtain clarity, then so be it.

Nansen, a data firm, reports that Binance experienced significant outflows after the SEC announcement on Monday. The data firm estimates $779 million over 24 hours.

Binance’s spokesperson said that outflows “were expected when news like this is released” and seemed to have stabilized. “All withdrawals have been met as per normal without us stopping our stride.”

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