For the second time in 24 hours, the US Securities and Exchange Commission has sued a major cryptocurrency exchange. Yesterday, the regulator filed charges against Binance and its CEO, Changpeng Zhao, with accusations of manipulative trading practices, mishandling customer assets, and failures of corporate control. Today, the SEC followed up with a suit against the Nasdaq-listed exchange Coinbase, alleging that it has violated securities laws.
The double salvo sends a clear message that the SEC is gunning for crypto. The upshot of this could be that US investors lose access to popular crypto assets.
“We are reaching an end state where if the current regulatory crackdown in the US proceeds unchecked, then you’re basically banning most crypto activity in the US,” says Omid Malekan, an adjunct professor at Columbia Business School and author of Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets and Platforms.
The SEC’s latest complaint doubles down on its long-standing assertion that many crypto tokens are simply securities, as defined under existing laws in the US. That means they fall under its purview, the regulator says. Based on that interpretation, the suit, filed in the Southern District of New York, accuses Coinbase of knowingly operating an unregistered securities exchange by selling tokens, including Sol, Ada, and Matic, to US investors. The SEC also accuses Coinbase of violating securities law in connection with its staking service, which lets customers earn profits on certain crypto holdings by pooling them and locking them up.
“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: The consequences for the investing public are far too great,” said Gurbir S. Grewal, director of the SEC’s enforcement division, in a public statement. “Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them.”
Like Binance yesterday, Coinbase turned the finger of blame back on the regulator, claiming the SEC has failed to mark out a road to compliance for crypto businesses. “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,” says Paul Grewal, the company’s chief legal officer. Coinbase has “demonstrated commitment to compliance,” he claims, and will continue to operate as usual while it defends against the complaint.
This tension—over the interpretation of existing securities laws and whether they apply to crypto—will form the center of the case to come, says Noelle Acheson, an independent crypto analyst. “It’s very much game on,” Acheson says.
With the filings against Coinbase and Binance, the SEC has now formally alleged that seven of the top 15 largest cryptocurrencies are securities. Bitcoin is considered an exception, and the SEC has not rendered a clear verdict on Ether, but the agency “seems to be using a broad rubric by which to classify these tokens as securities,” says Molly White, author of crypto-skeptic blog Web3 Is Going Just Great.
Any exchange that supports the trading of securities must first register with the SEC—a process that comes with various reporting and diligence requirements. SEC chair Gary Gensler has long called on crypto exchanges to register or face enforcement action.
But the demand creates a catch-22 of sorts that threatens viability in the US of crypto assets that are deemed securities: Gensler demands that crypto exchanges register with the SEC, but the exchanges claim there is no means of doing so. In March, Paul Grewal told WIRED that “Coinbase is not asking for special treatment” but that there is no clear path to registering because the process makes no accommodation for the unique attributes of crypto tokens. Coinbase CEO Brian Armstrong reiterated the same message in a tweet responding to today’s SEC complaint.
Coinbase’s share price fell nearly 14 percent after the case was announced. Dan Dolev, senior fintech equity research analyst at Mizuho, estimates that about 30 percent of Coinbase’s revenue could be at risk as the crypto industry comes under tighter scrutiny. Some of that loss could fall off with alt coin trading, if those now have to be registered as securities, and the exchange could lose another chunk from a loss in staking revenue. More risk-averse institutional investors might start to steer clear of the exchange, while banks may be reluctant to work with an organization that is attracting regulatory attention. After a chaotic year in the crypto industry, this is just another blow for Coinbase. “This downward spiral is only getting worse,” Dolev says.
The complaints against Coinbase and Binance are likely to take years to pass through the courts—as demonstrated by the SEC’s case against Ripple, which deals in many of the same issues. Short of legislative intervention from Congress, questions around the classification of crypto assets and jurisdiction of the SEC will remain unresolved too. All the while, the US crypto industry will hang in limbo.
Some in the industry think that’s part of the motivation. “It’s an effort to chill the market,” says Justin Browder, partner at law firm Willkie Farr & Gallagher. The complaints will serve to put crypto on ice in the US, he explains. For now, exchanges will continue to operate and customers are still able to trade, but a question mark will hang over the legality of the crypto assets named in the complaints for the duration of the legal proceedings. Equally, new crypto businesses are less likely to want to set up shop in a country that has demonstrated itself unsympathetic to the sector.
Browder says the charges brought by the SEC this week indicate that the agency is perfectly comfortable with a future in which US residents have limited access to crypto assets. “The undercurrent is that the SEC views crypto assets, in the way they’re currently offered, as inappropriate for retail investors,” says Browder. “If the SEC thinks this asset class needs to be curtailed, these two actions are the most effective way to send the signal.”