The Securities and Exchange Commission (SEC) is reportedly planning to sue Coinbase, one of the largest cryptocurrency exchanges in the world. The news marks an escalation in the SEC’s crackdown on digital currency firms, and if a lawsuit is filed, it would be the agency’s most significant move to assert its jurisdiction over the crypto industry.
According to Coinbase, it received a letter known as a Wells notice from the SEC, which alerts companies that regulators believe they may have violated investor-protection laws. The notice is not final, and the SEC’s commissioners must authorize any lawsuits or enforcement settlements.
Coinbase has been a driving force in the digital-currency markets since its founding in 2012. The company has helped bring tens of millions of customers into the industry, and it has listed some of the most popular digital assets on its exchange.
The SEC’s lawsuit against Coinbase would represent a significant challenge for the company and its CEO, Brian Armstrong. The agency’s concerns reportedly center on several aspects of Coinbase’s business, including the assets listed on its exchange, its staking service Coinbase Earn, and its wallet service.
Coinbase Earn is a program that allows customers to earn rewards on their digital assets by staking. Staking is a process in which crypto investors lock up their coins to facilitate transactions on the underlying blockchain network. A crypto wallet holds digital tokens for users.
In response to the SEC’s notice, Coinbase Chief Legal Officer Paul Grewal stated, “We are prepared for this disappointing outcome and confident in the legality of our assets and services.” Grewal also said that Coinbase welcomes a legal process to provide clarity and demonstrate that the SEC has not been fair or reasonable when it comes to engaging on digital assets.
The news of the SEC’s lawsuit against Coinbase has sparked debate in the crypto industry, with some arguing that the agency’s actions are an overreach. If Coinbase were to prevail in a lawsuit, it would bolster the industry’s claims that virtual currencies should not be subject to U.S. securities laws.
The potential lawsuit relates to Coinbase’s proposed product called Coinbase Lend, which would allow customers to earn interest on their digital assets. The SEC has reportedly taken issue with the product, arguing that it constitutes an unregistered security.
Coinbase has pushed back against the SEC’s position, arguing that the product does not qualify as a security and that the company has been transparent in its dealings with regulators. The company has also expressed a willingness to engage in a legal process to resolve the matter.
“We are prepared for this disappointing outcome and confident in the legality of our assets and services,” said Coinbase Chief Legal Officer Paul Grewal. “If needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”
The news has had an immediate impact on Coinbase’s stock price, which fell nearly 12% in after-hours trading following the announcement. The drop came on the heels of a broader sell-off in crypto-related stocks and bitcoin, which had seen a rally in recent weeks but turned negative following the Federal Reserve’s rate increase announcement on Wednesday.
An SEC lawsuit against Coinbase could have significant consequences for the exchange, potentially leading to injunctions that would block the company from certain activities. However, it is worth noting that the SEC has only sued a few crypto exchanges despite its yearslong crackdown on crypto sales and trading.
In a message posted to Twitter late Wednesday, Coinbase CEO Brian Armstrong referenced the changing position of the SEC towards his company over the past two years. The SEC allowed Coinbase to go public in 2021, he wrote, after reviewing the company’s disclosures related to its asset listing process and staking.
Coinbase shares debuted on public markets in April 2021, just days before Gary Gensler was sworn in as SEC chair.
