NEW YORK, June 6 (Reuters) – The top US securities regulator sued cryptocurrency platform Coinbase on Tuesday, the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of the crackdown on the industry and one that could dramatically change a market that largely operates outside of regulation.
The US Securities and Exchange Commission (SEC) on Monday targeted Binance, the world’s largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of running a “web of deception”.
If successful, the lawsuits could change the crypto market by successfully asserting SEC jurisdiction over the industry which for years has argued that tokens do not constitute securities and should not be regulated by the SEC.
“The two cases are different, 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 a former federal prosecutor, added, however, that the SEC has yet to catch such major crypto players.
“If the SEC prevails in either case, the cryptocurrency industry will be transformed.”
In the complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman in crypto transactions, while avoiding disclosure requirements meant to protect the investors.
The SEC said Coinbase traded at least 13 crypto asset securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Coinbase suffered about $1.28 billion in net customer outflows following the lawsuit, according to initial estimates from data firm Nansen. Shares of Coinbase parent Coinbase Global Inc ( COIN.O ) closed up $7.10, or 12.1%, at $51.61 after earlier falling as much as 20.9%. They are up 46% this year.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as usual and has “demonstrated a commitment to compliance.”
Oanda senior market analyst Ed Moya said the SEC “looks like it’s playing Whac-A-Mole with crypto exchanges,” and since most exchanges offer a range of tokens that operate on blockchain protocols targeted by regulators, “it seems like this is just the beginning.”
The leading cryptocurrency bitcoin has been an ironic beneficiary of the crackdown.
After an initial plunge to a near three-month low of $25,350 following Binance’s suit, bitcoin rebounded to more than $2,000, surpassing the previous day’s high. It was trading just below $27,000 at 0410 GMT.
“The SEC is making life almost impossible for some altcoins and that’s actually driving some crypto traders back to bitcoin,” explained Oanda’s Moya.
BROKER, EXCHANGE CRACKDOWN
Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlines the definition of the term “security,” but many experts rely on two US Supreme Court cases to determine whether an investment product constitutes a security.
[1/2] The logo of the US Securities and Exchange Commission and representations of cryptocurrency can be seen in this photo taken on June 6, 2023. REUTERS/Dado Ruvic/Illustration
SEC Chair Gary Gensler has long said that tokens constitute securities and continues to assert its authority in the crypto market, focusing initially on the sale of tokens and interest-bearing crypto products. More recently, it has targeted unregistered crypto broker dealers, exchange trading and clearing activities.
While some crypto companies are licensed as alternative trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform operates as a full-blown stock exchange. The SEC also this year accused Beaxy Digital and Bittrex Global of failing to register as an exchange, clearing house and broker.
“The whole business model is built on a non-compliance with US securities laws and we’re asking them to comply,” Gensler told CNBC.
Crypto companies have denied that the tokens meet the definition of a security, saying the SEC’s rules are unclear, and that the SEC is overstepping its authority in trying to regulate them. However, many companies have stepped up compliance, stockpiled products and expanded overseas in response to the crackdown.
Kristin Smith, CEO of the Blockchain Association trade group, rejected Gensler’s efforts to regulate the industry.
“We are confident that the courts will prove Chair Gensler wrong in due course,” he said.
Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion of crypto customer assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion in net income last year.
The SEC’s lawsuit on Tuesday seeks civil penalties, the recovery of ill-gotten gains and injunctive relief.
On Monday, the SEC accused Binance of inflating trading volume, diverting customer funds, improperly pooling assets, failing to restrict US customers from its platform, and misleading customers about its controls.
Binance promises to vigorously defend itself against the lawsuit, which it says reflects the SEC’s “wrongful and willful refusal” to provide clarity to the crypto industry.
Customers have recovered about $790 million from Binance and its US affiliate following the lawsuit, Nansen said.
On Tuesday, the SEC filed a motion to freeze assets owned by Binance.US, Binance’s US affiliate. Binance’s holding company is based in the Cayman Islands.
“It’s important to note that recent regulatory actions are aimed at ensuring that companies operating in the cryptocurrency industry comply with securities laws and protect investors – this will always be their goal,” said Joshua Chu, group chief risk officer at blockchain technology firms XBE , Coinlllectibles and Marvion.
“These events will ultimately lead to a more stable and credible industry, which may help to attract more institutional investors and mainstream adoption.”
Reporting by Jonathan Stempel in New York and Hannah Lang and Michelle Price in Washington; Additional reporting by Kevin Buckland in Tokyo and Rae Wee in Singapore; Editing by Leslie Adler and Christopher Cushing
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