The U.S. Securities and Exchange Commission (SEC) has taken legal action against Coinbase, the largest cryptocurrency exchange in the United States, alleging that the platform has been operating illegally by failing to register with the regulator. This lawsuit marks the SEC’s second consecutive case against a major cryptocurrency exchange, coming just a day after its legal action against Binance, the world’s largest cryptocurrency exchange, and its founder Changpeng Zhao.
SEC Chair Gary Gensler has been actively seeking to establish the commission’s jurisdiction over crypto markets, referring to them as a “Wild West” of investing. Gensler aims to protect investors and restore trust in capital markets amidst the rapid growth of digital assets.
In response to the lawsuit, Coinbase’s General Counsel, Paul Grewal, stated that the company will continue its normal operations. Grewal criticized the SEC’s enforcement-focused approach, highlighting the absence of clear rules for the digital asset industry and its impact on America’s economic competitiveness.
Following the news of the lawsuit, shares of Coinbase Global Inc, the parent company of Coinbase, experienced a significant decline, dropping 16.2% to $49.33. The stock had initially fallen as much as 20.9%.
According to the SEC’s complaint filed in a federal court in Manhattan, Coinbase has allegedly generated billions of dollars since at least 2019 by acting as an intermediary in cryptocurrency transactions. However, the SEC asserts that Coinbase evaded disclosure requirements designed to safeguard investors.
The SEC specifically mentioned that Coinbase traded at least 13 crypto assets that are considered securities and should have been registered. Tokens such as Solana, Cardano, and Polygon were among those mentioned.
Coinbase, established in 2012, has amassed over 108 million customers and reported $130 billion in customer crypto assets and funds on its balance sheet as of March. The company’s net revenue of $3.15 billion last year was primarily generated from transactions, accounting for 75% of its total.
The SEC’s complaint addresses various aspects of Coinbase’s business, including Coinbase Prime, which handles orders; Coinbase Wallet, providing access to liquidity; and the Coinbase Earn staking service.
In response to the lawsuit, SEC Enforcement Chief Gurbir Grewal emphasized that regulatory rules cannot be disregarded simply because they are disliked or deemed inconvenient. The SEC seeks civil fines, recovery of ill-gotten gains, and injunctive relief through the lawsuit. In March, the SEC had previously alerted Coinbase about potential securities charges.
Coinbase’s relationship with Gensler has been contentious since 2021 when the SEC threatened legal action if Coinbase were to allow users to earn interest by lending digital assets. The company ultimately abandoned the idea.
In the Binance case, the SEC accused the exchange of inflating trading volumes, misappropriating customer funds, commingling assets improperly, failing to prevent wealthy U.S. customers from using its platform, and misleading customers regarding its controls. Binance vowed to vigorously defend itself against the lawsuit, claiming that the SEC’s refusal to provide clarity and guidance to the crypto industry was misguided.
