On Tuesday, the United States Securities and Exchange Commission (SEC) sued Coinbase alleging violation of federal laws. The regulator alleged that the largest US-based exchange violated federal conditions that required it to register as an exchange and be overseen by the regulator.
In its lawsuit, the SEC accused the firm of trading at least 13 crypto assets that are securities and were not registered. The SEC stated that these assets should have been registered with regulators before they were issued. Registration typically involves giving investors financial statements and detailed risk disclosures that are reviewed by regulators.
Among the list of assets, some of the tokens were Solana, Cardano, and Polygon, the same stablecoins which were claimed as securities in the SEC’s lawsuit against Binance. A day before SEC charged Coinbase, it initiated a lawsuit against Binance’s US subsidiary and its CEO Changpeng Zhao. Notably, the cases mark enforcement actions against two major crypto exchanges within a week. In its remark, the SEC stated:
Because Coinbase made those tokens available for trading and the SEC alleges they are securities, the company was required to register as an exchange, brokerage, and clearing agency.
Following the lawsuit, Coinbase shares took a dip and dropped by about 17% in early trading. The SEC had warned Coinbase of a possible enforcement action via Wells Notice in March. In the following months, both parties often targeted the other and called their methods flawed.
In response to SEC’s Wells Notice, Coinbase filed a “narrow action” in federal court against the regulator to seek clarity on regulation. However, in response to a writ of mandamus filed by Coinbase, the SEC made its stance very clear in that it was not prepared to abide by and provide any clarity on crypto regulations. It also claimed that Coinbase does not and cannot demonstrate a clear and indisputable right to relief.
Notably, Gary Gensler, the SEC chief, has been adamant in his stance that all crypto assets are securities except Bitcoin. Even while testifying to lawmakers, he outrightly rejected the need for specific crypto regulation and emphasized that existing regulations are sufficient. Despite the intense criticism of his antagonistic approach to the crypto industry, he has continued to reiterate his belief.
Right after the news of the lawsuit against Coinbase flared, Genlser in a CNBC interview, shed his negative perspective on the industry. He stated that the crypto industry’s entire business model is “built on non-compliance” and added that crypto exchanges are “commingling a number of functions,” which cannot be accepted. He added:
We don’t need more digital currency. We already have digital currency. It’s called the U.S. Dollar. It’s called Euro. It’s called the Yen. They’re all digital now.
Gensler wants the crypto exchanges to break themselves apart, and separate their order execution, brokerage, and clearing functions. The resulting structure would better resemble how Wall Street operates, with stock exchanges, brokers, and clearing firms functioning as separate businesses that follow rules tailored to their operations and risks.
However, crypto exchanges have resisted Gensler’s demand to remake themselves in the image of Wall Street. They also say many tokens aren’t securities and that financial disclosures cannot be provided in all cases as public companies do. This hasn’t seemed to convince Gensler and his larger enforcement-oriented team at SEC. In his interview, he added:
Without that proper disclosure, the public can’t answer a question as to whether it’s just counterfeiting or a scam or something else.
The crypto industry as well as several US lawmakers have flagged Gensler’s behavior and called it detrimental to innovation. The lawmakers have also accused him of driving away the position of the US as the crypto hub. However, Gensler has continued his regulation via an enforcement approach and has brought big names under his radar.