NEW YORK, June 6 (Reuters) – The largest US securities regulator filed a lawsuit against cryptocurrency exchange Coinbase on Tuesday, the second lawsuit in two days against a major crypto exchange, in a significant escalation of a crackdown on the industry that could turn Significantly a market that has largely worked out of regulation.
The US Securities and Exchange Commission (SEC) on Monday targeted Binance, the world’s largest cryptocurrency exchange. The SEC has accused Binance and its CEO Changpeng Zhao of operating a “web of fraud”.
If successful, the lawsuits could transform the cryptocurrency market by successfully asserting SEC jurisdiction over an industry that has argued for years that tokens do not constitute securities and should not be regulated by the SEC.
Kevin O’Brien, partner at Ford O’Brien Landy and former federal attorney general, said, however, that the SEC had not previously dealt with such major players in crypto.
“If the SEC prevails either way, the cryptocurrency industry will change.”
Since at least 2019, Coinbase has made billions of dollars by acting as an intermediary in crypto transactions, while evading disclosure requirements intended to protect investors, the SEC said in its complaint filed in Manhattan federal court.
The SEC said that Coinbase has traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano, and Polygon.
Coinbase suffered about $1.28 billion in net customer outflows after the lawsuit, according to preliminary estimates from data firm Nansen. Shares of Coinbase’s parent Coinbase Global Inc (COIN.O) closed down $7.10, or 12.1%, at $51.61 after earlier dropping 20.9%. It’s up 46% this year.
Coinbase General Counsel Paul Grewal said in a statement that the company will continue to operate as usual and has “demonstrated a commitment to compliance.”
Ed Moya, senior market analyst at Oanda, said the SEC “looks like it’s playing Whac-A-Mole with cryptocurrency exchanges,” and since most exchanges offer a set of tokens that run on blockchain protocols targeted by regulators, this seems to be the case. It’s just the beginning.”
Cryptocurrency pioneer Bitcoin has been an ambivalent beneficiary of the crackdown.
After an initial drop to a nearly three-month low of $25,350 following the Binance lawsuit, bitcoin has rebounded more than $2,000, surpassing the previous day’s high. It was trading at just under $27,000 at 0410 GMT.
“The SEC is making life near impossible for many altcoins, and this is actually driving some cryptocurrency traders back into bitcoin,” Oanda’s Moya explained.
Mediation, repression exchange
Securities, unlike other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 defined the term “security,” yet many experts rely on two U.S. Supreme Court cases to determine whether an investment product constitutes a security.
[1/2] The US Securities and Exchange Commission logo and representations of cryptocurrency are seen in this illustration taken on June 6, 2023. REUTERS/Dado Ruvic/Illustration
SEC Chairman Gary Gensler has long said that tokens constitute securities and has steadily asserted its authority over the crypto market, initially focusing on selling tokens and interest-bearing crypto products. Recently, it targeted unregistered crypto broker trader, exchange trading, and clearing activity.
While a few crypto companies are licensed as an alternative trading system, a type of trading platform that brokers use to trade listed securities, no crypto platform functions as a full-fledged stock exchange. The SEC also this year sued both Beaxy Digital and Bittrex Global for failing to register as an exchange, clearinghouse, and broker.
“The entire business model is built around non-compliance with US securities laws and we’re asking them to comply,” Gensler told CNBC.
Crypto firms refute that tokens meet the definition of security, say the SEC’s rules are vague, and that the SEC has overstepped its authority in trying to regulate them. However, many companies have ramped up compliance, discontinued products and expanded outside the country in response to the crackdown.
Kristen Smith, CEO of the Blockchain Association trade group, dismissed Gensler’s efforts to oversee the industry.
“We are confident that the courts will prove President Gensler wrong in due course,” she said.
Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion in customer crypto assets and funds on its balance sheet. The transactions accounted for 75% of its net revenue of $3.15 billion last year.
The SEC’s lawsuit on Tuesday seeks civil fines, wrongful gains damages and injunctive damages.
On Monday, the SEC charged Binance with inflating trading volumes, diverting customer funds, improperly commingling assets, failing to restrict US customers from its platform, and misleading customers about its controls.
Binance pledge to vigorously defend itself against the lawsuit, which it said reflects the SEC’s “misguided and conscious refusal” to provide clarity to the cryptocurrency industry.
Nansen said clients withdrew about $790 million from Binance and its US affiliates in the wake of the lawsuit.
On Tuesday, the Securities and Exchange Commission (SEC) filed a motion to freeze assets owned by Binance.US, the US subsidiary of Binance. Binance Holdings is headquartered in the Cayman Islands.
“It is important to note that the recent regulatory actions are aimed at ensuring that companies operating in the cryptocurrency industry comply with securities laws and protect investors – this will always be their goal,” said Joshua Chu, Group Chief Risk Officer at Blockchain Technology Firms XBE. , collectibles and Marvion.
“These events will eventually lead to a more stable and trustworthy industry, which could help attract more institutional investors and drive widespread adoption.”
Additional reporting by Jonathan Stempel in New York and Hannah Lang and Michelle Price in Washington. Additional reporting by Kevin Buckland in Tokyo and Rai Wei in Singapore. Editing by Leslie Adler and Christopher Cushing
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