SEC sues Coinbase to broaden crackdown on crypto exchanges

The US Securities and Exchange Commission has taken aim at a broader swath of the cryptocurrency market, launching a pair of lawsuits against exchanges that together account for half of global trading in digital assets.

The financial regulator sued San Francisco-based exchange group Coinbase on Tuesday, alleging it violated US securities law by failing to register as a broker, national securities exchange or clearing agency. Coinbase shares have taken a huge hit.

The enforcement action comes a day after the SEC filed a complaint against Binance and its chief executive officer, Changpeng Zhao, alleging a number of civil charges including improperly mixing customer funds with a trading firm owned by Zhao.

SEC Chairman Gary Gensler has sought to stake his agency’s claim as the principal regulatory authority on crypto in the US. The commission has initiated enforcement actions against crypto companies since the beginning of the year.

The SEC alleges that Coinbase has operated as an unregistered broker since at least 2019 through its exchange platform, Prime Brokerage, and crypto wallet service, which stores customer funds on their behalf. The assets held in these locations are what the SEC defines as securities, “thus bringing Coinbase’s operations within the purview of the securities laws,” the agency said.

“Coinbase’s alleged failure deprives investors of important protections, including rulebooks that prevent fraud and manipulation, proper disclosures, safeguards against conflicts of interest, and regular oversight by the SEC,” Gensler said.

Coinbase revealed in March that it had received a so-called Wells Notice from the SEC, warning of possible enforcement action. The company has said that there is a need for clear rules for its business.

“The SEC’s reliance on an enforcement-only approach in the absence of clear regulations for the digital asset industry is harming US economic competitiveness and companies like Coinbase,” said Paul Grewal, General Counsel, Coinbase. “The solution is legislation that allows fair rules for the road to be transparently developed and uniformly enforced, not litigation.”

The SEC case is the latest regulatory dispute to embroil Coinbase, which reported $3.1 billion in net revenue last year. In January the company reached a $100 million settlement with New York regulators over failures in anti-money laundering controls.

The company was also hit with an order from the Alabama securities regulator on Tuesday, which asked Coinbase to demonstrate why it should not be barred from “selling unregistered securities” in the US state, the agency said in a statement. The action, which focuses on Coinbase’s staking rewards program, stems from a task force involving 10 state securities regulators, including California and Illinois.

The SEC brought 13 charges against the world’s largest crypto exchange Binance and Zhao. Binance’s international exchange, its US exchange and Coinbase collectively hold 50.6 percent of the crypto trading market, according to data provided by data platform CCData.

“These trading platforms, they call themselves exchanges, are taking over a lot of the functions[we don’t see]in traditional finance,” Gensler told CNBC on Tuesday.

The SEC is demanding Coinbase and Binance to pay monetary penalties and penalties for allegedly violating certain sections of the Securities and Exchange Act, obtaining unfair advantages. At Binance, the SEC seeks to permanently bar Zhao from serving as an officer or director of any issuer whose securities are registered with the agency.