NEW YORK, June 6 (Reuters) – The top U.S. securities regulator sued cryptocurrency platform Coinbase on Tuesday, the second case in two days against a major crypto exchange. A market that operates largely outside of regulation.
The US Securities and Exchange Commission (SEC) on Monday took aim at Binance, the world’s largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of running a “web of fraud.”
If successful, the lawsuits could reshape the crypto market, successfully asserting the SEC’s jurisdiction over the industry, which has argued for years that tokens are not securities and should not be regulated by the SEC.
“The two cases are different, but overlap and point in the same direction: the SEC’s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of federal securities laws,” said Kevin O’Brien, a partner at Ford O’Brien Lundy. The former federal prosecutor said the SEC had never taken on major crypto players like this before.
“If the SEC wins both, the cryptocurrency industry will be transformed.”
In a complaint filed in Manhattan federal court, the SEC said Coinbase has made billions of dollars acting as an intermediary in crypto transactions since at least 2019, while avoiding disclosure requirements to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that must be registered securities, including tokens such as Solana, Cardano and Polygon.
Coinbase suffered about $1.28 billion in net customer outflows following the lawsuit, according to preliminary estimates from data firm Nansen. Shares of Coinbase parent Coinbase Global Inc ( COIN.O ) were down $7.10, or 12.1%, at $51.61 after earlier falling as much as 20.9%. They are up 46% this year.
Paul Grewal, Coinbase’s general counsel, said in a statement that the company will continue to operate as usual and has “demonstrated a commitment to compliance.”
Oanda senior market analyst Ed Moya said the SEC “seems to be playing Whac-A-Mole with crypto exchanges,” adding that since most exchanges offer a range of tokens that operate on blockchain protocols targeted by regulators, “it looks like it’s just the beginning.”
Leading cryptocurrency Bitcoin has been an ironic beneficiary of the crackdown.
Bitcoin rallied more than $2,000 from the previous day’s highs, after a nearly three-month initial plunge to $25,350 following the Binance case. It was trading below $27,000 at 0410 GMT.
“The SEC is making life almost impossible for many altcoins, and it’s actually pushing some crypto traders back into bitcoin,” explained Onda’s Moya.
Broker, Exchange Crackdown
Bonds, unlike other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks. The Securities Act of 1933 outlined the definition of the term “security,” although many experts rely on two U.S. Supreme Court cases to hold that an investment product constitutes a security.
[1/2] This chart taken on June 6, 2023 features the US Securities and Exchange Commission logo and representations of cryptocurrency. REUTERS/Dado Ruvic/Illustration
SEC Chairman Gary Gensler has long asserted his authority over the crypto market, initially focusing on the creation of token bonds and the sale of tokens and interest-bearing crypto products. More recently, it has targeted unregistered crypto broker-dealers, exchange trading and settlement activity.
Although a few crypto companies are licensed as alternative trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform functions as a full-fledged stock market. The SEC sued Beaxy Digital and Bittrex Global this year for failing to register as an exchange, clearing house and broker.
“The entire business model is built on non-compliance with US securities laws, and we’re asking them to comply,” Gensler told CNBC.
Crypto companies dispute that tokens meet the definition of a security, saying the SEC’s rules are vague and that the SEC is overstepping its authority in trying to regulate them. However, many companies have increased compliance, discontinued products and expanded outside the country in response to the crackdown.
Christine Smith, CEO of the Blockchain Association trade group, dismissed Gensler’s efforts to oversee the industry.
“We hope the courts will prove Chairman Gensler wrong in due course,” he said.
Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion in customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion in net revenue last year.
The SEC’s filing on Tuesday seeks civil penalties, ill-gotten gains and injunctive relief.
On Monday, the SEC accused Binance of inflating trading volumes, diverting client funds, improperly pooling assets, failing to restrict US clients from its platform and misleading clients about its controls.
Finance promised It was aggressive in defending itself against the lawsuit, which it said reflected the SEC’s “wrongful and conscious refusal” to provide clarity to the crypto industry.
Customers received about $790 million from Binance and its U.S. subsidiary following the lawsuit, Nansen said.
On Tuesday, the SEC filed a request to freeze assets owned by Binance.US. Finance’s holding company is based in the Cayman Islands.
“It is important to note that recent regulatory actions aimed at ensuring that companies operating in the cryptocurrency industry comply with securities laws and protect investors – this has always been their goal,” said Joshua Xu, Group Chief Risk Officer at blockchain technology firm XBE. , Coinllectibles and Marvion.
“These events will ultimately lead to a more stable and reliable industry, which will attract more institutional investors and enable mainstream adoption.”
Reporting by Jonathan Stempel in New York and Hannah Long and Michael Price in Washington; Additional reporting by Kevin Buckland in Tokyo and Ray Wei in Singapore; Editing by Leslie Adler and Christopher Cushing
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