Coinbase, the largest cryptocurrency platform in the United States, is facing legal action from the U.S. Securities and Exchange Commission (SEC) for allegedly operating unlawfully without registering as an exchange. This comes shortly after the SEC files lawsuit against Binance, the world’s largest cryptocurrency exchange, and its founder Changpeng Zhao.
Regulatory Challenges and Industry Response
SEC Chair Gary Gensler has been actively asserting the commission’s authority over the cryptocurrency industry, which he views as a “Wild West” that undermines investor trust in U.S. capital markets. Gensler emphasizes the importance of complying with U.S. securities laws, stating that the business models of these crypto exchanges rely on non-compliance.
Crypto companies argue that the SEC’s regulations are unclear and that the agency is overstepping its bounds in attempting to regulate them. Following the lawsuit, Coinbase has reportedly experienced significant net customer outflows of around $1.28 billion.
Coinbase Response and Additional Allegations
Coinbase’s general counsel, Paul Grewal, has affirmed that the company will continue its operations as usual and remains committed to compliance. However, Coinbase is also facing accusations of securities law violations related to its staking rewards program from ten U.S. states, led by California.
According to the SEC’s complaint, Coinbase has acted as an intermediary in crypto transactions since at least 2019, making billions of dollars while evading disclosure requirements meant to protect investors. The SEC alleges that Coinbase traded at least 13 crypto assets considered securities without proper registration.
Coinbase and Binance: Company Overview and Impact
Coinbase, established in 2012, serves a vast customer base of over 108 million users and holds $130 billion of customer crypto assets and funds as of March. The staking rewards program, which has approximately 3.5 million customers, involves Coinbase pooling crypto assets to support blockchain network activity and providing rewards to customers after deducting a commission.
Apart from the SEC lawsuit, Coinbase is also facing regulatory challenges from various U.S. states, including a $5 million fine from New Jersey for selling unregistered securities.
The SEC’s lawsuit against Coinbase aims to impose civil fines, recover unlawfully obtained gains, and obtain injunctive relief. Gensler’s regulatory efforts in the crypto space have led industry players to prioritize compliance, delay product launches, and expand operations beyond the United States. Some within the industry oppose the SEC’s crackdown, with the Blockchain Association trade group expressing confidence that the courts will rule against Chair Gensler.
Binance, the previous target of the SEC’s lawsuit, has pledged to vigorously defend itself and criticized the SEC for failing to provide clarity to the crypto industry. Following the lawsuit, Binance and its U.S. affiliate saw significant customer withdrawals totaling approximately $790 million.
The legal challenges faced by both Coinbase and Binance, prominent players in the crypto exchange market, highlight the increased scrutiny and regulatory efforts aimed at bringing the crypto industry in line with existing securities laws.