7th June 2023 – (New York) U.S. Securities and Exchange Commission (SEC) has sued cryptocurrency exchange Coinbase in a move that could transform the crypto market. The lawsuit comes a day after the SEC took aim at Binance, the world’s largest cryptocurrency exchange, accusing it of running a “web of fraud”. The SEC accuses Coinbase and its CEO Brian Armstrong of making billions of dollars since at least 2019 by acting as a middleman on crypto transactions while developing disclosure requirements to protect investors. Coinbase suffered a net customer outflow of $1.28bn following the lawsuit. If the SEC prevails, it could assert its jurisdiction over the industry, which has argued for years that tokens do not constitute securities and should not be regulated by the SEC.
“The two cases are separate, but overlap and point in the same direction: the SEC’s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of federal securities laws,” said Kevin O’Brien, a partner at Ford O’Brien Landy and Said. The former federal prosecutor, however, countered by saying that the SEC has not taken on such major crypto players before. “If the SEC prevails in either case, the crypto industry will be transformed.”
Unlike other assets such as commodities, securities are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined the definition of the term “security,” yet many experts rely on two US Supreme Court cases to determine whether an investment product constitutes a security. SEC Chairman Gary Gensler has long stated that tokens constitute securities and asserted his authority over the crypto market, initially focusing on the sale of tokens and interest-bearing crypto products. Recently, it has targeted unregistered crypto broker dealer, exchange trading and clearing activity.
Crypto companies deny that the tokens meet the definition of a security, saying the SEC’s rules are vague, and that the SEC is overstepping its authority in trying to regulate them. Nevertheless, many companies have ramped up compliance, discontinued products and expanded outside the country in response to the crackdown.
Coinbase has not yet responded to the lawsuit, but its general counsel Paul Grewal said in a statement that the company will continue to operate as usual and has “demonstrated a commitment to compliance.” Binance promised to vigorously defend itself against the lawsuit, which it said reflects the SEC’s “misguided and willful refusal” to provide clarity to the crypto industry.