SEC Sues Coinbase for Operating an Unregistered Exchange

It's not been a good day for Coinbase (COIN) so far: The crypto exchange is being sued by the U.S. Securities and Exchange Commission (SEC), ten state regulators have the company in their sights, and Coinbase stock has dropped almost 14% in early trading.

The SEC's Complaint Against Coinbase

According to the SEC's complaint, Coinbase violated U.S. securities laws by operating as an unregistered exchange, broker-dealer and clearing agency.

"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler in a statement.

The SEC complaint also alleges Coinbase's staking program is akin to an unregistered security and investment contract, claiming that it allows investors to earn financial returns through Coinbase's managerial efforts.

The complaint said in a bid to boost its profits, the exchange sought to list more crypto assets, even suggesting that certain issuers remove "problematic language" from the description of the crypto assets despite being "aware of the risk that it could be making available for trading on the Coinbase Platform crypto assets that were being offered and sold as securities."

This legal action comes only a day after the SEC filed similar charges against Binance and its founder, Changpeng Zhao. Similar to the complaint against Binance, the SEC identified 13 assets listed on Coinbase as crypto asset securities. Alleged securities included in the Coinbase complaint that weren't included in the Binance complaint include Chiliz (CHZ), Flow (FLOW), Internet Computer (ICP), Near (NEAR), Voyager Token (VGX), Dash (DASH), and Nexo (NEXO).

States Regulators Also Come For Coinbase

A task force of ten states—Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin—is also bringing Coinbase under the scanner.

A show cause notice by the Alabama Securities Commission as a part of the task force has given Coinbase 28 days to explain why it should not be asked to "cease and desist from selling unregistered securities in Alabama."

An Industry Built on Non-Compliance with Securities Laws

During a Tuesday appearance on CNBC, SEC's Gensler made the point that the crypto industry as a whole is built on the concept of non-compliance with securities laws, based on the regulator's discussions with dozens of crypto entities. Gensler went as far as to say the business model of crypto intermediaries comingles customer funds and trades against their users.

The SEC chair also pushed back against the view that enforcement actions against various crypto exchanges or projects have the side effect of stifling innovation in the United States.

"It's the opposite of [sacrificing innovation]," said Gensler. "Through appropriate regulation of the securities markets for ninety years, we have helped the U.S. economy grow and prosper. ...We've punched above our weight class in the capital markets in part because of robust oversight of the markets, and it's for one reason: It builds trust in the investing public. ...The crypto markets are undermining that trust."