Coinbase Receives SEC Notice Signaling Intent to Sue Over Crypto Offering

by Arthur · March 22, 2023

(Bloomberg) — Coinbase Global Inc. said it received a notice from the SEC formally declaring the securities regulator’s plans to take enforcement action against the largest U.S. crypto exchange, the latest development in a long-running dispute between the watchdog and the digital-asset company.

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Securities and Exchange Commission Chairman Gary Gensler has repeatedly said that many of the tokens and products offered by crypto companies are securities and that the trading platforms must be registered with his agency. Those warnings increased after the collapse of several prominent companies last year, including Sam Bankman-Fried’s FTX, leaving investors facing billions of dollars in losses.

In a filing Wednesday, Coinbase said the so-called Wells notice applies to aspects of the exchange, as well as its staking service Coinbase Earn and Coinbase Wallet. A Wells warning comes at the end of an investigation and gives companies time to refute the agency’s allegations. They often, but not always, lead to coercive actions – either lawsuits or settlements and fines. At the same time, not all potential problems identified in the alert need to be part of any action.

Coinbase said its products and services will continue to operate as usual for now. “We are prepared for this disappointing outcome and confident in the legality of our assets and services,” Paul Grewal, CEO of Coinbase, said in a statement. “If necessary, we welcome a legal process to provide the clarity we have advocated and to demonstrate that the SEC has simply not been fair or reasonable in its involvement in digital assets.”

The crypto industry has been rattled by the uptick in SEC enforcement actions since the start of the year, including a settlement with Coinbase’s rival Kraken and a Wells notice to Paxos Trust Co. which claims that the Binance USD stablecoin it issues is an unregistered security.

For its part, Coinbase has claimed that the tokens listed on the exchange are not securities and that it has a thorough vetting process. Grewal has also argued that the company’s betting product is very different from that offered by Kraken, which was the focus of the recent SEC settlement. Coinbase CEO Brian Armstrong has said the company is willing to fight the SEC in court if a settlement cannot be reached.

Kraken agreed to suspend the program in the United States without admitting or denying the SEC’s allegations.

Coinbase shares fell 5% after trading in New York. Shares of the company have rebounded this year as Bitcoin climbed to more than $28,000, though the stock is still down more than 70% from its November 2021 peak.

Not the first time

This is not the first time Coinbase has received a Wells notice. The SEC warned the company in 2021 that it considered the company’s proposed “Loans” product, which would have allowed users to earn interest by lending their crypto holdings, to be a security. The stock exchange later canceled the launch.

Coinbase executives have expressed frustration with the SEC’s approach, saying they have made good-faith efforts to cooperate with the regulator and that it is unclear how the agency’s rules will apply to digital asset trading platforms. Those frustrations grew after the SEC identified several tokens listed on the exchange as securities as part of an insider trading case involving a former employee. Shortly thereafter, Bloomberg reported that while Coinbase was not sued as part of that case, the agency was separately investigating the firm over its token listings.

Representatives from Coinbase have met with the SEC more than 60 times over the past nine months to try to resolve the issues with the SEC, but those talks have not been fruitful, according to a person familiar with the matter who requested anonymity to discuss non-public information.

The company also filed a rulemaking petition with the agency last year, which it followed up with a comment about the need for more clarity around strike services.