US lawsuit against Coinbase heralds deepening crypto crackdown

WASHINGTON – The United States Securities and Exchange Commission (SEC) widened its sweeping crackdown on crypto by accusing Coinbase Global of running an illegal exchange, a move that could make it harder for the industry to operate and for US citizens to trade.

In a 101-page lawsuit filed on Tuesday in federal court in New York, the SEC alleged that Coinbase for years evaded its rules by letting users trade numerous crypto tokens that were actually unregistered securities.

Just a day earlier, the regulator sued rival Binance, alleging a slew of violations.

The SEC moved against Coinbase, the biggest US crypto exchange, after chair Gary Gensler repeatedly argued that most tokens are subject to his agency’s oversight and that swaths of the industry have been breaking the law.

At the same time, US regulators warned banks to steer clear of crypto because of potential risks to the financial system, making it harder for US citizens to invest.

The SEC’s civil lawsuit stands out because of Coinbase’s high profile in the US, and its status as a publicly traded company. The stock fell 12 per cent to close at US$51.61 in New York trading on Tuesday.

The case against Coinbase, coupled with Monday’s against Binance, forms a one-two punch against the industry.

The SEC alleged Binance, the world’s largest crypto platform, and its chief executive Zhao Changpeng, mishandled customer funds, misled investors and regulators, and broke securities rules.

“The SEC under Gensler is dead set on enforcing rules that, if followed, would kill off almost all of crypto,” Professor Omid Malekan, adjunct professor at Columbia Business School who has consulted on crypto, said in a text message.

Gensler crackdown

Mr Gensler said in an interview on Bloomberg Television that the SEC worked with 10 states to bring its complaint against Coinbase. He cast the agency’s efforts to clamp down on crypto as one of both investor protection and US market integrity.

“Why should the New York Stock Exchange or broker dealers we all know and respect be undermined by this other corner of the capital markets, which is sort of saying, thumbing their nose and saying ‘Catch us if you can’?,” he told Bloomberg’s Mr David Westin.

‘Enforcement-only approach’

Coinbase was co-founded in 2012 by Mr Brian Armstrong, its chief executive officer. He was not accused of wrongdoing in the SEC’s complaint.

Although Binance is bigger globally, Coinbase is the largest US crypto exchange, with more than 150 different tokens that trade. Mr Paul Grewal, the company’s top lawyer, has previously said that those tokens are not securities.

“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,” he said in a statement on Tuesday.

Wall Street’s main regulator is seeking an order that would require Coinbase to comply with securities laws, and give up what the agency says were ill-gotten gains.

The regulator also alleged that Coinbase acted as an exchange, broker-dealer, and clearinghouse all without registering with the SEC for any of those roles.

“This back-to-back, double whammy of actions by the SEC against Binance and Coinbase confirm that US regulators believe strongly that these entities have for years ignored the securities laws,” Mr Ashok Ayyar, counsel at Ashbury Legal, said by text message.