Matt Stankiewicz, Partner at The Volkov Law Group, joins us for another post detailing the SEC’s suit against Coinbase. Matt can be contacted at [email protected].

On June 6, 2023, the U.S. Securities and Exchange Commission (“SEC”) officially filed suit against Coinbase, Inc. (“Coinbase”) alleging the company operated as an unregistered securities exchange, broker, and clearing agency.  The SEC is also suing Coinbase for failing to register its staking-as-a-service program.  This suit follows a similar one filed against Binance only a day prior.  The SEC has clearly set its sights on the crypto industry by targeting the two largest and most prominent exchanges. 

Coinbase’s brand has become virtually synonymous with cryptocurrency in the U.S. market.  The company went public in 2021 through an IPO.  Many of our readers may remember their commercials airing during the Super Bowl in 2022.  Coinbase provides more than 108 million users with a place to buy, sell, and trade cryptocurrency.  It is one of the key on-roads for fiat currency into the cryptocurrency ecosystem—meaning, a place to deposit U.S. dollars to buy Bitcoin, Ethereum, or countless other tokens.  In the past week alone, the exchange had nearly $400 million in trading volume across more than 200 token listings.

Coinbase previously received a Wells Notice in March of this year, which signals that the SEC made a preliminary determination that the company has violated securities laws and intends to file suit.  Following the receipt of the Wells Notice, Coinbase’s Chief Legal Counsel, Paul Grewal, issued a public statement regarding the SEC’s actions.  In that statement, he noted that Coinbase has been trying desperately to register with the SEC—across 30 meetings in nine months—and has simply been rebuffed in its efforts. Despite Coinbase’s efforts, the SEC ultimately filed this suit in the Southern District of New York.

The allegations against Coinbase are relatively tame compared to what the SEC alleged against Binance.  The SEC not only targets the exchange, but also Coinbase Prime and Coinbase Wallet.  These two products, among other things, allow users to access other services outside of the Coinbase ecosystem.  Further, the SEC also targets Coinbase’s staking program, which it alleges is itself a security.

Much of the complaint focuses on the fact that Coinbase offered many tokens that the SEC considers to be securities.  The SEC specifically highlighted Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infiniy (AXS), Chiliz (CHZ), Flow Blockchain (FLOW), Internet Computer (ICP), Near Protocol (NEAR), Voyager (VGX), Dash (DASH), and Nexo (NEXO).  For reference, SOL, ADA, MATIC, FIL, SAND, and AXS were also listed in the Binance suit (which also included MANA, ALGO, and COTI).  The complaint highlights Coinbase’s marketing regarding Cardano as an example.  The page in question, located here, shows price, market information, community ratings, related assets, and also provides a funnel to the exchange for visitors that wish to purchase it.  Coinbase even offers various incentives to open an account in order to trade these alleged securities.

As I mentioned in my article on Binance, the crux of the suit is that these tokens are considered securities.  Meanwhile, it’s left to Coinbase provide a defense and the tokens themselves, along with the entities behind them, are not involved to defend the classification that would be catastrophic for each of them.  Understandably, the prices of these tokens have plummeted since the suits were filed.

Furthermore, the SEC alleges that Coinbase’s violations go back to 2019.  Coinbase supporters have been quick to point out that the SEC reviewed the company’s materials and approved the company for its IPO.  While the SEC addresses this point in the complaint, noting that it merely reviews disclosures and makes no determination regarding the underlying business, many are quick to wonder how the SEC can achieve its mission of protecting investors by approving businesses that it ultimately deems illegal. Ultimately, this argument is unlikely to hold significant weight in the court of law, but is certainly a powerful one in the court of public opinion. 

It is clear that the SEC is aggressively bearing down on the cryptocurrency industry.  Companies in the industry, as well as investors, must take heed and adjust accordingly.  We will be following these cases closely and offering updates as they continue.