The Securities and Exchange Commission (SEC) warned Coinbase COIN +0.52%Global in March that it would likely sue the company for violating the laws. Coinbase’s (ticker COIN) 73-page reply on Thursday firmly denied that the platform offered securities. This could lead to a long legal battle which may determine the future of crypto markets in the U.S.
Coinbase executives have said that they sent a written response to the SEC and a video with it last week. They also met agency staff in order to go through the document. The staff of the SEC will review the submission and make a decision about whether to recommend filing a lawsuit. The SEC commission will then vote whether to proceed.
The potential lawsuit is not only important for Coinbase, but also for the entire crypto industry. Gary Gensler, the SEC chair, has said that he believes that the majority of tokens are under his jurisdiction and that exchanges such as Coinbase should register with the agency. Coinbase and others deny this assertion.
If Coinbase is sued and loses, it may severely limit the tokens that are available to U.S. traders and other products like crypto “staking,” which allows investors to post their tokens on a protocol for a yield. Coinbase executives are still unsure of what aspect of their business SEC plans to target, but they believe it will likely be the tokens that the company lists, the staking product or other services.
Coinbase stated in its response that the SEC approved its registration statement for Coinbase to become a publicly traded company 2021 as proof that the SEC unfairly changed their stance regarding Coinbase’s compliance.
The document states that “this abrupt move towards litigation was not the result of discovering new facts about Coinbase’s business. The Commission has the same factual information today as it has for years.”
A spokesperson for the SEC said that the agency does not “acknowledge or deny the existence of any investigation until or unless charges are filed.”
The spokesperson did not mention Coinbase by name, but said that the reviews of public listing materials for companies are done to ensure compliance with accounting and disclosure rules. They do not address other laws.
Coinbase said that litigation would also expose the SEC’s lack of engagement in Coinbase’s efforts for compliance and its own analysis of whether its products qualify as securities.
Katherine Minarik is Coinbase’s vice president of litigation. She said, “We are still surprised and confused.”
Minarik stated that his company had not received clarity about what the possible enforcement action would include and that it hoped to engage with SEC staff again on how to treat its products before moving forward to litigation.
Gensler has stated publicly that such a convergence of minds is unlikely. Gensler and some legislators and consumer advocates have argued that crypto has long ignored basic registration and reporting requirements that are required in the investment industry. The SEC has claimed that the crypto market is subject to fraud and manipulative practices and that trading platforms require oversight to protect consumers.
If the lawsuit does not end in a settlement, it could have a lasting impact on crypto and token markets. Staking was seen by Coinbase as an area of growth, given the decline in retail trading. SEC scrutiny may also limit Coinbase’s and other firms’ willingness to list smaller tokens that are more likely to qualify as securities by the SEC.
In the interview, Minarik said that Coinbase was trying “as much” as possible to keep business going as usual.