SEC sues Coinbase in widening crackdown on crypto exchanges

The US Securities and Exchange Commission has taken aim at a broad swath of the cryptocurrency market, launching a pair of lawsuits against exchanges that together account for half of global trading in digital assets.

The financial regulator on Tuesday sued Coinbase, the San Francisco-based exchange group, alleging it violated US securities law by failing to register as a broker, national securities exchange or clearing agency. Coinbase shares fell sharply.

The enforcement action came a day after the SEC filed a complaint against Binance and its chief executive Changpeng Zhao, alleging an array of civil charges including improperly mixing customer funds with those of a trading firm owned by Zhao.

Gary Gensler, the SEC chair, has sought to stake his agency’s claim as the lead regulatory authority over crypto in the US. The commission has launched a blitz of enforcement actions against crypto companies since the start of the year.

The SEC alleged that Coinbase has since at least 2019 operated as an unregistered broker through its exchange platform, prime brokerage and crypto wallet service, which stores customers’ funds on their behalf. Assets available on these venues included what the SEC defined as securities, “thus bringing Coinbase’s operations squarely within the purview of the securities laws”, the agency said.

“Coinbase’s alleged failures deprive investors of critical protections, including rule books that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC,” Gensler said.

Coinbase in March disclosed that it had received a so-called Wells notice from the SEC, warning of potential enforcement action. The company has said clearer rules are needed for its business.

“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,” said Paul Grewal, Coinbase general counsel. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation.” 

The SEC case is the latest regulatory controversy to ensnare Coinbase, which reported $3.1bn in net revenue last year. The company in January reached a $100mn settlement with New York regulators over failures in money-laundering controls.

The company on Tuesday was also hit with an order from the Alabama securities regulator, which asked Coinbase to demonstrate why it should not be barred from “selling unregistered securities” in the US state, the agency said in a statement. The action, which focuses on Coinbase’s staking rewards programme, stems from a task force involving 10 state securities regulators including in California and Illinois.

The SEC brought 13 charges against Binance, the world’s largest crypto exchange, and Zhao. Binance’s international exchange, its US exchange and Coinbase collectively hold 50.6 per cent of the crypto trading market, according to figures provided by data platform CCData.

“These trading platforms, they call themselves exchanges, are commingling a number of functions which [we don’t see] in traditional finance,” Gensler told CNBC on Tuesday.

The SEC is seeking to enjoin Coinbase and Binance from violating certain sections of the securities and exchange acts, disgorge alleged ill-gotten gains and pay a monetary penalty. At Binance, the SEC also seeks to permanently ban Zhao from acting as an officer or director of any issuer whose securities are registered with the agency.