SEC targets Coinbase for alleged regulatory non-compliance

The regulator accuses Coinbase of operating as an unregistered exchange, and facilitating the sale of billions in crypto assets without necessary protections.

Coinbase, the largest cryptocurrency trading platform in the US, is facing a lawsuit from the Securities and Exchange Commission (SEC) for allegedly violating securities law. The SEC claims that Coinbase operated as an unregistered broker, failing to comply with regulations.

This legal action follows the SEC's recent lawsuit against cryptocurrency exchange Binance for allegedly mishandling funds and providing false information to regulators and investors.

The lawsuit against Coinbase does not come as a surprise, as the SEC already issued a Wells notice indicating potential enforcement action.

Moving to regulation

The SEC’s move against both Coinbase and Binance is part of a broader effort to establish order and regulation in the crypto industry. The regulatory body aims to align digital asset exchanges with traditional financial institutions and remove bad actors from the sector.

In the lawsuit, the SEC pointed out that Coinbase's leaders were aware of the regulatory framework governing digital asset trading but failed to adhere to it. The filing accused Coinbase of prioritizing profit over investor protection and compliance with the law.

According to the complaint filed in a federal court in Manhattan, Coinbase operated as an unregistered exchange. The SEC alleges that Coinbase facilitated the sale of billions of dollars’ worth of crypto assets without providing investors with essential protections.

Gurbir S. Grewal, the director of the SEC's enforcement division, emphasized the importance of adhering to rules and highlighted the negative consequences of ignoring them. The SEC has consistently maintained that most crypto products should be treated as securities and comply with existing US laws. This means that exchanges and platforms facilitating the trading of crypto assets must be registered.

Rules, not litigation

Coinbase's chief legal officer, Paul Grewal, responded to the lawsuit by calling for legislative solutions and fair rules instead of litigation.

Many executives in the crypto industry have argued that digital assets are different from traditional securities and should not be subject to the same regulations. However, the SEC maintains that existing rules are sufficient for determining whether a digital asset is a security.

The SEC's complaint disputes Coinbase's claims of compliance with securities laws, dismissing them as empty promises.

No allegations of fraud

The lawsuit comes at a time when Coinbase and other crypto industry leaders are seeking to change the narrative around digital assets. Coinbase's CEO, Brian Armstrong, is scheduled to testify before a House committee to discuss a draft bill aimed at regulating crypto.

Unlike the lawsuit against Binance, the SEC's complaint against Coinbase does not include allegations of fraud.

Additionally, Coinbase's status as a publicly listed company has prompted the argument that it adheres to strict operational rules. Coinbase had previously petitioned the SEC for new regulations and even sued the agency for not responding to its request.

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Written by Edward Pearcey

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