SEC Files Lawsuit Against Coinbase for Unregistered Securities Exchange Activities

June 6, 2023: The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Coinbase, accusing the company of violating federal securities laws. This comes just a day after the SEC filed a suit against Binance.

According to the SEC, Coinbase has been operating simultaneously as an unregistered broker, exchange, and clearing agency. The SEC argues that Coinbase engaged in activities such as soliciting customers, handling orders, facilitating bids, and acting as an intermediary, all without proper registration. The lawsuit names Coinbase, Inc. and Coinbase Global, Inc. as defendants but does not include founder and CEO Brian Armstrong or other executives.

The SEC suit claims that Coinbase’s platform combines the functions of brokers, exchanges, and clearing agencies, which are typically separate in traditional securities markets. However, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure requirements established by Congress for securities markets.

In a press release, SEC Chair Gary Gensler stated that Coinbase’s failure to comply with regulations deprives investors of protection against fraud, manipulation, and conflicts of interest. He called for developing crypto-specific legislation to establish fair and transparent rules for the digital asset industry.

Coinbase’s Prime, Wallet, and staking products, as well as the tokens listed on its platform, are cited by the SEC as areas where the company violated federal securities laws. The lawsuit news caused the entire cryptocurrency market to decline, including a drop in Coinbase’s premarket stock price.

The SEC argues that Coinbase knew that some of the cryptocurrencies it offered U.S. customers could be considered securities, the SEC pointed to Coinbase’s Crypto Ratings Council, an initiative launched by the exchange in 2019 to assess whether a cryptocurrency is a security. The suit alleges that Coinbase knowingly added crypto assets with high-risk scores to its platform, even when it recognized that these assets had characteristics of securities.

Tokens issued by foundations, companies, or tied to protocols, including Solana, Cardano, Polygon, Sandbox, Filecoin, Axie Infinity, Chiliz, Flow, Internet Computer, Near, Voyager, Dash, and Nexo, were identified by the SEC as securities in the suit.

The SEC also mentioned Coinbase’s public registration statement, which acknowledged that some listed assets could be securities in the risk factors section.

The SEC had warned Coinbase about potential legal action, sending a Wells Notice earlier this year. In the lawsuit filed on Tuesday, the SEC accuses Coinbase of violating the Exchange Act and the Securities Act. The SEC seeks to permanently enjoin Coinbase from further violations and disgorgement of profits and civil penalties.
Unlike the Binance lawsuit, the SEC did not allege the commingling of customer funds or improper transfers by Coinbase executives in this case.