Coinbase, don't feel left out. SEC has a lawsuit for you, too

Rules are rules, say watchdogs. Well, there aren't any clear ones, biz shoots back

It's been a bad week for the cryptocurrency world. Yesterday the US Securities and Exchange Commission sued the world's largest crypto exchange, Binance, alleging 13 counts of fraud and other financial crimes. Today, the watchdog is coming down on the second largest exchange, Coinbase, for similar reasons. 

And it's only Tuesday.

The SEC's case against Coinbase, its second assault on a major cryptocurrency exchange in two days, accuses the San Francisco biz of operating as a national securities exchange, broker, and clearing agency without having gone to the SEC to be licensed as such. Unsurprisingly, that's a no-no.

"Coinbase's alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC," SEC chairman Gary Gensler said. 

Coinbase also offered cryptocurrency staking-as-a-service, in which it pools the cryptocurrency of multiple investors to validate proof-of-stake cryptocurrencies including Ethereum. The SEC isn't happy about that because Coinbase did so without registering its staking service as a security offering, it is claimed.

Unlike in the Binance case the SEC announced yesterday, the commission isn't alleging outright malfeasance by Coinbase officials - only that it selectively ignored rules. 

"While Coinbase's calculated decisions may have allowed it to earn billions, it's done so at the expense of investors by depriving them of the protections to which they are entitled. Today's action seeks to hold Coinbase accountable for its choices," said SEC Division of Enforcement director Gurbir Grewal.

States want in on the Coinbase action, too

Lest you assume this week's cryptoexchange regulatory apocalypse was restricted to SEC actions, a coalition of ten state securities regulators in America today released statements telling Coinbase to show cause why it shouldn't be ordered to cease and desist from selling unregistered securities in their jurisdictions. 

In one example, the Alabama Securities Commission (ASC) said in a statement [PDF] that it was going after Coinbase for similar reasons to the SEC: selling unregistered securities, and therefore putting investors' cash at risk, allegedly. 

"Coinbase's nearly 3.5 million staking rewards program accounts nationwide are not insured … there is no protection from loss for any of these accounts, including the more than 33,000 accounts currently held by Alabama investors," the ASC said. 

Alabama was joined in its Coinbase action by California, Illinois [PDF], Kentucky [PDF], Maryland [PDF], New Jersey, South Carolina, Vermont [PDF], Washington, and Wisconsin [PDF]. The states variously are threatening to ban Coinbase from operating in their jurisdictions, fining the corporation to various degrees, or simply asking it to comply with the law. 

Coinbase, ever humble, goes to bat 'for the industry'

Coinbase CEO Brian Armstrong issued a statement in which he said the SEC's action is an opportunity for Coinbase "to represent the industry in court to finally get some clarity around crypto rules."

Armstrong claims that Coinbase had tried repeatedly to register with the SEC, but that "there is no path to 'come in and register.'"

"Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it," Armstrong added. 

There is no path to 'come in and register'

That line has been Coinbase's standard response to the SEC for a while, and has included the company arguing as recently as yesterday that the US needed clearer rules around cryptocurrencies. In April, Coinbase filed a petition with the SEC to issue cryptocurrency rules, though the watchdog's boss Gensler has insisted for a while that such rules for cryptocurrencies aren't needed. 

"The investing public has the benefit of U.S. securities laws. Crypto should be no different, and these platforms, these intermediaries need to come into compliance," Gensler said on telly news today when speaking of the Coinbase action. 

Armstrong did assert that, unlike other cases involving crypto firms, "the complaint filed against us is exclusively focused on what is or is not a security," and not fraud or other financial crimes. 

"We are confident in our facts and the law," the chief exec added. ®

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