MANHATTAN (CN) — Seeking to avoid a collapse or scandal similar to that seen at FTX last year, federal officials accused the cryptocurrency broker Coinbase on Tuesday of violating a number of securities laws.
The Securities and Exchange Commission laid out its case in 101-page complaint, saying the crypto trading platform has been operating for the last four years as an unregistered broker and clearing agency, while also failing to register the sale of its crypto asset staking service programs.
Just a day earlier, the agency sued crypto trading platform Binance for allegedly mishandling and commingling customer funds and operating as an unregistered exchange. The SEC contends that the Cayman Islands-based exchange engaged in the same shady practices that led to the collapse of FTX last year.
While second worldwide in trading volume, after Binance, according to the tracking site CoinMarketCap, Coinbase is the largest crypto asset trading platform in the United States, trading in more than 30 cryptocurrencies since its founding in 2012. Unlike Binance, Coinbase does not issue its own crypto currency.
“Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk,” the SEC alleged Tuesday, bringing its complaint in Manhattan Federal Court.
“By collapsing these functions into a single platform and failing to register with the SEC as to any of the three functions, and not having qualified for any applicable exemptions from registration, Coinbase has for years defied regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors,” the complaint continues.
The SEC also accuses Coinbase of having failed to properly register its “staking services” — in which investors’ crypto assets are pooled and transferred and then committed in return for rewards for a 25% to 35% commission.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones,” said Gurbir Grewal, director of the SEC’s enforcement division. “Today’s action seeks to hold Coinbase accountable for its choices.”
The SEC’s investigation into Coinbase began last year, according to the company’s quarterly filings, but the company claims it has been trying unsuccessfully to work with regulators on creating clearly defined rules for the industry and setting up guardrails.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Coinbase general counsel Paul Grewal said in a statement. “In the meantime, we’ll continue to operate our business as usual.”
The lawyer for Coinbase is unrelated to the director of the SEC's enforcement division.
Coinbase says it previously had asked the SEC to craft “reasonable crypto rules for Americans” and a path toward registration. In a blog post from Monday, the company's general counsel wrote that the company developed two separate registration models and asked for the SEC’s feedback but received no response.
Grewal with Coinbase noted in his post that the company had been scheduled to meet with the SEC in January 2023 on rulemaking but that staff for the agency then canceled at the last minute and shifted its focused back to enforcement. “Tell us the rules and we will follow them,” Grewal wrote. “Give us an actual path to register, and we will register the parts of our business that need registering.”
The SEC counters that Coinbase has been “paying lip service to its desire to comply with applicable laws” and that it “has elevated its interest in increasing its profits over investors’ interests, and over compliance with the law.”
Coinbase has been in the SEC’s crosshairs before, drawing threats of a lawsuit over a cryptocurrency lending product before that product was canceled.
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