Coinbase sued by SEC over alleged unregistered securities
In this photo illustration, the Coinbase cryptocurrency exchange website is seen on the screen of a computer on October 05, 2018 in Paris, France.
The U.S. federal government is pursuing a case against one of the most popular cryptocurrency trading platforms. On June 6, the U.S. Securities and Exchange Commission sued Coinbase, the second-largest crypto exchange by volume, according to CoinMarketCap.com. The federal regulator alleges Coinbase operated its crypto asset trading platform as an unregistered national securities exchange and broker, per the June 6 press release. The SEC also alleges at least 13 crypto assets that Coinbase made available to customers, including Solana and Cardano's tokens, qualify as "crypto asset securities," according to the complaint. Coinbase's staking program, which the regulator describes as a way for crypto investors "to earn financial returns through Coinbase's managerial efforts," counts as an investment contract and unregistered security, the SEC says. In a tweet following the SEC's announcement, Coinbase co-founder and CEO Brian Armstrong said, in part, "Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules." "The SEC's reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America's economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance," Coinbase's chief legal officer and general counsel Paul Grewal said in a statement to CNBC Make It. "In the meantime, we'll continue to operate our business as usual." This comes just one day after the SEC sued Binance, the world's largest crypto exchange, and its billionaire founder, Changpeng Zhao. On June 5, the agency filed 13 charges against them both, which included allegations that Zhao and his exchange worked to "secretly allow high-value U.S. customers" to continue trading on its unregulated international exchange despite publicly claiming that U.S. customers were restricted from doing so, according to the June 5 press release. Zhao has dismissed the charges on Twitter.
What the SEC's crackdown on crypto may mean for investors
"The harsh messaging coming from the agency and its Chair Gary Gensler is a sign the SEC may be doing exactly what many in the industry have believed: shut down crypto in the U.S.," Chen Arad, co-founder and chief experience officer of Solidus Labs, a company that provides tools to help crypto exchanges and institutions prevent market manipulation, tells CNBC Make It. The U.S. remains a core market for crypto firms. About 20% of Americans say they've invested in, traded or used cryptocurrency, per a January NBC News poll, and around 42% of Americans between the ages of 18 and 34 say they've dabbled in crypto trading. Still, platforms may prefer to avoid the potential regulatory risks involved in operating here and shift their focus to countries with clearer legal requirements, Arad says. Omid Malekan, an adjunct professor at Columbia Business School and author of "Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms," agrees. Some crypto firms may choose limit which services they offer to U.S. customers due to the complicated regulatory framework, he tells CNBC Make It. "That's bad for U.S. investors," he says. "It means that they'll have less options and are probably going to have to pay higher fees." Malekan owns Coinbase stock and is a longtime Coinbase customer. There is a potential upside to the SEC's latest enforcement action against crypto exchanges. Now that the lawsuits have been filed, the platforms can respond to the allegations in an open court and the public will be able to listen in, Arad says. But don't expect crypto traders to make a mass exodus from various exchanges any time soon, Malekan says. "The people who are going to stay away or leave already have," he says. "Those who are still left and investing and using services like Coinbase are probably OK with the risks that are involved." Although the ongoing regulatory dynamic in the U.S. can have some effect on demand, the people who want to buy crypto will continue to find ways to do so, Arad says, and using established crypto exchanges that are regulated in the U.S. is still one of the best and safest ways.
Does the suit affect bitcoin specifically?
Bitcoin, one of the most well-known cryptocurrencies, wasn't named in the SEC's complaint. Bitcoin has been determined to be a commodity under the Commodity Exchange Act, which means, typically, the Commodity Futures Trading Commission regulates it, according to the agency's website. There's a general understanding within the industry that if you're just trading bitcoin, you're probably OK, Malekan says. Cryptocurrency prices briefly rose following the SEC's announcement. On June 6, bitcoin prices climbed to a little above $27,100, according to Coin Metrics. As of June 12 at 11:09am EST, bitcoin had fallen to around $25,800, per Coin Metrics.
The state of crypto platform regulation in the U.S.
Currently, one of the ways the SEC determines whether an asset is an investment contract and, therefore, a security, is through the "Howey test." If an asset meets the following criteria, the agency considers it to be a security that may be subject to federal securities law: There is an investment of money; in a common enterprise; in which the investor expects a profit; and the profit is derived solely from the efforts of others. But crypto challenges a lot of these older regulatory precedents and may require a new framework, Malekan says. "We don't regulate self-driving cars under the same rules that once applied to horse and buggies," he says. "With new financial instruments, we should probably have new rules."
Trading crypto on an exchange versus peer-to-peer
Source: CNBC
