First Binance, now Coinbase. The Securities and Exchange Commission filed another cryptocurrency-targeted lawsuit Tuesday, accusing crypto exchange Coinbase of operating as an unregistered securities exchange. The complaint was filed in Manhattan federal court. The move comes a day after the agency went after Binance with a lawsuit, accusing the exchange and founder Changpeng Zhao of misappropriating customer money, misleading investors, and continuing to recruit U.S.

customers despite not being permitted to operate in the country. The regulator’s complaints at the center of the Tuesday filing against Coinbase constitute the heart of its ongoing attempts to bring the cryptocurrency into line with securities law. “Coinbase has elevated its interest in increasing its profits over investors’ interests, and over compliance with the law and the regulatory framework that governs the securities markets and was created to protect investors and the U.S. capital markets,” the SEC’s filing read. Coinbase, on the other hand, has been bracing for this action for some time. In a March blog post—written in response to the SEC’s Wells notice to the company, a precursor of enforcement action—Coinbase said it has been operating with transparency, only to be bullied by regulators.

On Tuesday, the day of the SEC’s filing, the exchange’s chief legal officer, Paul Grewal, was scheduled to testify before a House committee regarding the new Digital Asset Market Structure Discussion Draft. Coinbase released a preview of his planned remarks Monday. “Congress needs to draw the lines between when digital assets and the technology that underpins them should be regulated as commodities, when they should be regulated as securities, and when financial regulations should not apply or simply would make no sense,” Grewal wrote. “As the legislative process unfolds this bill will no doubt evolve, but we believe it already offers a strong foundation on which to build a workable and balanced regulatory framework for crypto innovation within the U.S.” All About Regulation The SEC’s view, under Chairman Gary Gensler, is that some cryptocurrencies and other digital assets are securities and are thus subject to the oversight of his agency in the United States.

In Gensler’s view, the Howey Test—a Supreme Court rule for determining whether assets qualify as investment vehicles—holds sway. The wide view within the cryptocurrency industry contends that the Howey Test doesn’t apply. Gensler’s perspective also puts his agency at odds with other governmental regulators, notably the Commodities Futures Trading Commission, which has also sought to oversee cryptocurrencies and digital assets. The CFTC’s purview includes such financial products as derivatives, futures contracts, and options. These disputes, and the attendant murkiness, have stymied the industry in the United States and prompted crypto insiders to warn that the industry could abandon the U.S.

market and seek shelter in friendlier overseas locales. “Today’s lawsuit against Coinbase is not unexpected,” said James Wester, Research Director for Digital Assets and Crypto at Javelin Strategy & Research. “The SEC’s recent activity against other exchanges, and the chairman’s public positions, have made some action against Coinbase inevitable.” The proposed legislation Grewal was scheduled to speak about Monday is one congressional attempt to bring clarity to the situation. Tuesday’s filing—more so than Monday’s, which centered more on alleged malfeasance on the part of Binance than on legitimate areas of regulatory dispute—seems certain, at least in the short term, to keep matters far from resolution. “The issue with the Coinbase lawsuit is that it comes after Coinbase has asked for clarification and guidance on its activities from the SEC,” Wester said. “By bringing this action against Coinbase, the SEC seems to be saying it will not offer direction on compliance to market participants before they offer services but instead will proscribe activities via lawsuits after they have come to market.

That’s not a good method for encouraging innovation.”

By Craig Lancaster
Jun 06, 2023 00:00
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