The move, a day after it sued Binance and its founder, is part of SEC’s effort to gain control over crypto markets.
The US Securities and Exchange Commission (SEC) has sued Coinbase, accusing the largest US cryptocurrency platform of operating illegally for not registering as an exchange.
The lawsuit, filed Tuesday, is the SEC’s second in two days against a major crypto exchange following its case against Binance, the world’s largest cryptocurrency exchange, and its founder, Changpeng Zhao.
Both civil cases are part of SEC Chairman Gary Gensler’s effort to assert jurisdiction over crypto markets, which he called a “Wild West” of investing, and protect investors while bolstering their confidence in capital markets.
“The crypto markets undermine that trust, and I would say this: It undermines our overall capital markets,” Gensler told CNBC.
Crypto companies, including Coinbase, have said that SEC rules are unclear and are violating the regulator’s purported oversight of their industry.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as usual and has a “demonstrated commitment to compliance”.
Ten US states led by California are also accusing Coinbase of violating securities laws regarding its strike rewards program.
Shares of Coinbase’s parent, Coinbase Global Inc, were down $6.42, or 10.9 percent, at $52.29 in afternoon trading after falling as much as 20.9 percent earlier.
Coinbase customers withdrew more than $57 million within hours of the SEC filing, data firm Nansen said.
Thirteen crypto assets
In its complaint filed in Manhattan federal court, the SEC said Coinbase has made billions of dollars since at least 2019 by acting as a middleman on cryptocurrency transactions while evading disclosure requirements meant to protect investors has.
The SEC said Coinbase traded at least 13 cryptoassets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Founded in 2012, Coinbase served more than 108 million customers by a recent count and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75 percent of its $3.15 billion in net income last year.
In the staking rewards program, which has around 3.5 million customers, Coinbase pools crypto assets and uses them to support activity on the blockchain network in exchange for “rewards” it provides to customers after taking a commission for itself . The SEC said it is also an unregistered security and violates securities laws.
The states focused on this program are Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase $5 million for selling unregistered securities.
‘Can’t ignore the rules’
Tuesday’s SEC lawsuit seeks civil penalties, the recovery of ill-gotten gains and injunctive relief. The SEC warned Coinbase in March that charges could be coming.
“You simply cannot ignore the rules because you don’t like them or because you would prefer different ones,” SEC Enforcement Chief Gurbir Grewal said in a statement.
Gensler’s crypto crackdown has prompted the industry to push for compliance, keep products on the shelf and expand outside the country.
Kristin Smith, CEO of the Blockchain Association trade group, dismissed Gensler’s efforts to oversee the industry.
“We are confident that the courts will prove Chairman Gensler wrong in time,” she said.
In the Binance case, the SEC accused the exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform and misleading customers about its controls.
Binance has vowed to vigorously defend itself against the lawsuit, saying the case reflects the SEC’s “misguided and willful refusal” to provide clarity and guidance to the crypto industry.
Coinbase’s friction with Gensler dates back to 2021 when the SEC threatened to sue if Coinbase let users earn interest by lending out digital assets. The company scrapped the idea.
The case is SEC v Coinbase Inc et al, US District Court, Southern District of New York, No. 23-04738.
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