SEC sues Coinbase for operating illegally without registering with regulator

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6th June 2023 – (New York) The United States Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, the largest cryptocurrency exchange in the US, on Tuesday, accusing the exchange of operating illegally without registering with the regulator. This move comes after the SEC filed a lawsuit against Binance, the world’s largest cryptocurrency exchange, and its founder Changpeng Zhao.

Both lawsuits are part of SEC Chair Gary Gensler’s efforts to assert jurisdiction over cryptocurrencies and offer better protection to investors who trade virtual currencies. In a tweet, Gensler said, “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 inspection.”

The SEC complaint filed in Manhattan federal court alleges that Coinbase has made billions of dollars by handling cryptocurrency transactions since at least 2019, while evading the disclosure requirements meant to protect investors.

The lawsuit addressed several aspects of Coinbase’s business, including Coinbase Prime, which routes orders; Coinbase Wallet, which allows investors to access liquidity; and the Coinbase Earn staking service. In the staking program, Coinbase pools crypto assets and uses them to facilitate activity on the blockchain network in exchange for “rewards” it provides customers after taking a commission for itself.

The SEC claims that Coinbase was “fully aware” that its business was subject to federal securities laws but chose to ignore them. SEC Enforcement Chief Gurbir Grewal said in a statement, “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones.”

Coinbase has not yet responded to the lawsuit. However, shares of its parent company, Coinbase Global Inc, which is also a defendant in the lawsuit, fell 17.1% in premarket trading.

In the Binance case, the SEC accused the exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform, and misleading customers about its controls. The SEC’s actions against both Coinbase and Binance signal increased regulatory scrutiny of the cryptocurrency industry in the US.