US Agency Sues Cryptocurrency Exchange Coinbase

Company stock, Bitcoin prices drop after lawsuit filed

The mobile phone icon for the Coinbase application in New York, on April 13, 2021. (Richard Drew/AP Photo)

The U.S. Securities and Exchange Commission (SEC) on June 6 sued one of the largest cryptocurrency platforms in the world, sending the company’s stock down.

Coinbase, the platform, has been operating its crypto platform without registration, violating federal law, according to the lawsuit.

“Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets,” the suit, filed in federal court in New York, states. “All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.”

The Securities Exchange Act of 1934 requires companies to register with the SEC if it meets certain criteria, such as having assets valued at more than $10 million and issuing securities.

Coinbase operates a platform through which people can buy and sell cryptocurrencies like Bitcoin. Millions of dollars flow through the platform each day. Other features include “staking” assets and earning profits by allowing the assets to be used for crypto trading.

That’s one of the services Coinbase should have, but failed to, register, according to the SEC.

“Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections,” Gary Gensler, chair of the SEC, said in a statement.

Coinbase also should have registered because it issues securities, authorities said. Securities are defined in part as investment contracts, or pacts through which people invest money and expect profits. At least 13 assets that Coinbase offers meet the definition, according to the complaint, including tokens from Axie Infinity, Filecoin, and Voyager.

Coinbase knew that assets it offered could be designated as securities, including releasing a document in 2016 that cited a U.S. Supreme Court case that outlined how to determine if an arrangement involved an investment contract. The document stated that such a contrast is a type of security and that at least some tokens likely met the definition. Coinbase later asked developers of assets to answer questions that would provide answers relevant to the Supreme Court’s ruling. And the company also formed a group in 2019 that it said was aimed at providing “a fact-intensive analysis” to see whether certain cryptos were securities.

“Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices,” Gurbir Grewal, another SEC official, added.

Coinbase responded by calling for updated legislation from Congress.

“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,“ Paul Grewal, Coinbase’s chief legal officer and general counsel, said in an emailed statement to The Epoch Times. ”The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”

SEC officials said regulators in 10 states helped them investigate Coinbase, including regulators in Alabama, California, Maryland, Vermont, and Wisconsin.

Request to Court

U.S. officials want the court to step in and bar Coinbase from continuing its crypto services without registration.

“Unless Defendants are permanently restrained and enjoined, there is a reasonable likelihood that they will continue to engage in the acts, practices, transactions, and courses of business set forth in this complaint and in acts, practices, transactions, and courses of business of similar type and object in violation of the federal securities laws,” the suit states.

The SEC is also asking the court to hand over money described as “ill-gotten gains” to the government, as well as pay additional penalties for the alleged violations of the law.

The total sum of the requested payments was not detailed.

Coinbase recently reported that it drew $773 million in revenue in the first quarter, up 23 percent from the previous quarter. Most of the income came from consumer transactions and income on interest. The majority of consumer transactions were exchanging dollars for crypto or vice versa, though crypto-for-crypto exchanges were also made.

Prices Drop

Coinbase stock prices dropped in the wake of the lawsuit, down about 9 percent from the previous day.

Prices for Bitcoin, the most popular crypto, also went down initially, to about $25,400, but rebounded later in the morning to around $26,000.

Trading was still possible on Coinbase on Tuesday.

Coinbase describes itself as offering “a trusted and easy-to-use platform for accessing the broader cryptoeconomy.” The company started in 2012 and now operates in more than 100 countries.