The US Securities and Exchange Commission has filed a lawsuit against Coinbase, the largest American cryptocurrency exchange, alleging that it operated as an “unregistered broker, exchange, and clearing agency,” thereby violating US securities regulations. This legal action follows a similar case initiated by the regulator against Binance, the world’s largest cryptocurrency exchange, earlier this week.
In its complaint, the SEC stated that Coinbase cryptocurrency exchange had been functioning as an unregistered broker, exchange, and clearing agency since at least 2019 through its platform. The SEC accused Coinbase of disregarding regulatory structures and evading disclosure requirements put in place by Congress and the SEC to safeguard national securities markets and investors.
Coinbase’s Chief Legal Officer and General Counsel, Paul Grewal, expressed his opinion, emphasizing the need for clear rules and legislation for the digital asset industry. Grewal argued that the SEC’s enforcement-only approach was detrimental to America’s economic competitiveness and companies like Coinbase, which have consistently prioritized compliance. He called for transparent development and equal application of fair rules, rather than relying solely on litigation, while stating that Coinbase would continue its regular operations in the meantime.
SEC’s Primary Case
The SEC’s primary case relies on the assertion that the crypto tokens traded on Coinbase are essentially securities, which are subject to strict regulation under US law. Furthermore, the SEC specifically targets Coinbase’s “staking-as-a-service” program, claiming that it directly violates securities regulations. The program enables customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase‘s efforts.
At the core of this dispute lies the application of the Howey test, a well-established standard in US law used to determine whether something qualifies as a regulated security. This test, originating from a 1946 court case, defines a security as a contract, transaction, or scheme where an individual invests money in a common enterprise and expects to solely derive profits from the efforts of the promoter or a third party.
The SEC argues in its complaint that, despite Coinbase’s claims of desiring compliance with applicable laws, the company has consistently offered trading of crypto assets that qualify as investment contracts under the Howey test and established federal securities laws principles.
On Monday, the SEC also initiated a similar case against Binance, accusing the exchange of commingling billions of dollars and covertly funneling them to a separate company. Furthermore, the SEC alleges that Binance deliberately circumvented its own controls to allow US investors to trade on the unregulated international platform.
In the past, Coinbase had maintained a close working relationship with the SEC, differentiating itself from competitors by actively cooperating with regulators rather than engaging in fights or attempts to evade regulations. However, this relationship has become strained in recent years, leading Coinbase to sue the SEC in April, seeking explicit legalization of crypto securities.