NEW YORK, June 6 (Reuters) – The U.S. Securities and Exchange Commission on Tuesday sued Coinbase (COIN.O), accusing the largest U.S. cryptocurrency exchange of operating illegally because it failed to first register with the regulator.
The lawsuit is the second the SEC has filed in two days against a major crypto exchange, following its case against Binance, the world’s largest cryptocurrency exchange, and founder Changpeng Zhao.
Both civil lawsuits are part of SEC Chairman Gary Gensler’s efforts to assert jurisdiction over crypto markets, which on Tuesday he again described as the “wild west” of investing, protecting investors while boosting their confidence in the capital markets.
“The cryptocurrency markets are undermining that confidence, and I would say this: they are undermining our capital markets in general,” Gensler told CNBC.
Crypto companies including Coinbase have said the SEC rules are unclear, and the regulator is overreaching by emphasizing oversight of their industry.
Coinbase General Counsel Paul Grewal said in a statement that the company will continue to operate as usual and has a “clear commitment to compliance.”
Ten US states, led by California, are also taking legal action against Coinbase for alleged violations of securities law.
Shares of Coinbase Global Inc, Coinbase’s parent company, were down $8.18, or 13.9%, at $50.53 in late morning trading, after earlier falling as much as 20.9%.
Coinbase customers withdrew more than $57 million from the exchange within two hours of signing up, according to data firm Nansen.
Thirteen CRYPTO ORIGINALS
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 Securities and Exchange Commission 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.
Founded in 2012, Coinbase recently served more than 108 million customers, and ended in 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.
Tuesday’s complaint addressed several aspects of Coinbase’s business including Coinbase Prime, which directs orders; Coinbase Wallet, which gives investors access to liquidity; and Coinbase Earn Staking Service.
In staking, Coinbase collects crypto assets and uses them to facilitate activity on the blockchain network, in exchange for “rewards” that it provides to customers after taking a commission for itself.
States focus on this program and New Jersey fined Coinbase $5 million to sell unregistered securities.
“The rules cannot be ignored”
The SEC’s lawsuit on Tuesday seeks civil fines, wrongful gains damages and injunctive damages.
The Securities and Exchange Commission warned Coinbase in March that accusations could be made. She said the company was “fully aware” that its business was subject to federal securities laws, but had ignored it.
“You cannot simply ignore the rules because you don’t like them or because you prefer different rules,” Gurbir Grewal, SEC’s chief enforcement officer, said in a statement.
Gensler’s crypto campaign prompted the industry to ramp up compliance, discontinue products, and expand out of the country.
Kristen Smith, CEO of the Blockchain Association trade group, disputed Gensler’s claim to jurisdiction over the industry. “We are confident that the courts will prove President Gensler wrong in due course,” she said.
In the Binance case, the US Securities and Exchange Commission (SEC) is accused of exchanging inflated trading volumes, diverting customer funds, improperly mixing assets, failing to turn wealthy US clients off its platform, and misleading customers about its controls.
binance Pledge Defending vigorously against the lawsuit, he said the case reflected the SEC’s “misguided and conscious refusal to provide clarity and guidance to the cryptocurrency industry.”
Coinbase’s friction with Gensler dates back to 2021, when the Securities and Exchange Commission (SEC) threatened to sue Coinbase if it would allow users to earn interest by lending digital assets. The company scrapped the idea.
The case is SEC v Coinbase Inc and Others, US District Court, Southern District of New York, No. 23-04738.
(Reporting by Jonathan Stempel) in New York. Additional reporting by Hannah Lang and Michelle Price in Washington, D.C. and Manya Saini in Bengaluru; Editing by Jason Neely, Louise Heavens, Chizu Nomiyama and Nick Zieminski
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