The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Coinbase, the leading U.S. crypto exchange, accusing the company of violating federal securities law. The lawsuit comes shortly after a similar suit was filed against Binance.
According to the SEC, Coinbase has been operating as an unregistered broker, exchange, and clearing agency simultaneously. The SEC argues that Coinbase solicited customers, handled orders, allowed bids, and acted as an intermediary all at once. The lawsuit names Coinbase, Inc. and Coinbase Global, Inc. as defendants but does not specifically mention founder and CEO Brian Armstrong or any other executives. The SEC suit claims that “The Coinbase Platform merges three functions that are typically separated in traditional securities markets – those of brokers, exchanges, and clearing agencies.” It further states that Coinbase has not registered with the SEC as a broker, national securities exchange, or clearing agency, allowing the company to evade the disclosure requirements established by Congress for securities markets.
SEC Chair Gary Gensler emphasized in a press release that Coinbase’s blending of different functions was problematic. He stated that Coinbase’s alleged failures deprived investors of critical protections, including measures against fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. The SEC pointed out Coinbase’s Prime, Wallet, and staking products, as well as the tokens listed on its platform, as areas where federal securities laws were violated. The news of the lawsuit caused a decline in the entire crypto market and Coinbase’s premarket stock price.
The SEC argued that Coinbase was aware that some of the cryptocurrencies it offered to U.S. customers could be classified as securities. It referenced Coinbase’s Crypto Ratings Council effort, initiated in 2019 to create an informal system to assess whether a cryptocurrency was a security. The SEC claimed that during this period, Coinbase added crypto assets to its platform despite recognizing that they exhibited characteristics of securities, in order to achieve exponential growth and boost its own trading profits. The SEC identified several tokens, including solana (SOL), cardano (ADA), polygon (MATIC), sandbox (SAND), filecoin (FIL), Axie Infinity (AXS), Chiliz (CHZ), flow (FLOW), internet computer (ICP), near (NEAR), voyager (VGX), dash (DASH), and nexo (NEXO), as securities in the lawsuit. These tokens were available on Coinbase’s Prime or Wallet services, according to the SEC.
The lawsuit also referenced Coinbase’s public registration statement, highlighting that the company acknowledged in its risk factors section that some of the listed assets might be securities. The SEC had previously warned Coinbase about potential legal action by sending a Wells Notice, to which Coinbase responded in April.
In the current lawsuit, the SEC alleges that Coinbase violated the Exchange Act across four different counts by failing to register. It also claims that Coinbase violated the Securities Act and seeks a permanent injunction against the company to cease further violations, as well as disgorgement and civil penalties.