“We don't need such regulation.” How claims to Coinbase exchange will affect the crypto market

The US Securities and Exchange Commission (SEC) is investigating US cryptocurrency exchange Coinbase. According to Bloomberg, the SEC intends to find out if the crypto exchange allowed illegal trading in assets that should be registered as securities and whether they have the appropriate registration. Amid the news of the SEC investigation, investors began selling the company's shares, causing the rate to drop 21% to $52,90. The shares are trading at $56,60 as of July 28 at 14:00 UTC.

In response, Coinbase said in a blog post that the exchange did not list securities for trading. The exchange's legal spokesman Paul Grewal said that Coinbase analyzes whether an asset can be considered a security and takes into account regulatory requirements and the security of the asset before listing tokens. He noted that after considering the same facts as the SEC, the US Department of Justice (DOJ) decided not to file fraud charges and that Coinbase was willing to cooperate with the commission. “We are confident that our rigorous diligence process — a process the SEC has already reviewed — keeps securities off our platform, and we look forward to engaging with the SEC on the matter,” Paul wrote on Twitter.

The SEC's attention to Coinbase was drawn by an increase in the number of tokens available for trading, as well as a criminal case against the exchange's former manager, Ishanu Wahi. On July 21, a New York court, along with the FBI, charged the former employee and his associates with insider trading. According to the case file, they made $1,5 million from the listings of 25 cryptocurrencies. The SEC said nine of the tokens traded by the defendants were recognized as securities.

Much of the publicity for the fraudulent scheme came from well-known crypto influencer and UpOnly podcast host Jordan Fish (@Cobie). In April, Fish published a post on Twitter saying that he had found an Ethereum address with tokens purchased 24 hours before the listing was published on Coinbase. The tweet was subsequently cited by the DOJ in an indictment.

Fish has also made numerous public criticisms of Coinbase, particularly of token listing decisions behind what he believes are dubious projects. For example, the developers of the Polkamon project were accused of a pump-and-dump scheme, while Big Data Protocol was accused of suspending its work after blocking users' funds due to an incorrectly written contract. The former lost 90% in value since the creation of the project, and the token rate of the latter, after a similar drop, rose sharply by 132% when the listing was announced on Coinbase.

How fair are the claims?

According to Vladislav Utushkin, the founder of TOTHEMOON group of companies, if the pressure on exchanges continues, we may expect their transition to jurisdictions not controlled by the SEC or a drop in their popularity in favor of other market players who are not subject to the influence of institutionalists. “Of course, the US authorities understand this as well. For example, Pat Toomey, deputy chairman of the US Senate Banking Committee, accused the head of the SEC that his agency's regulatory measures were one of the prerequisites for the collapse of Celsius. They also publicly refused to explain why nine assets placed on Coinbase should be considered securities,” the expert explained.

Andrey Tugarin, CEO of GMT Legal, noted that the practice of classifying tokens as securities (investment contracts) has been around for a long time, and one of the most sensational examples was the SEC's decision regarding the recognition as securities of Gram tokens sold to ICO investors of the Telegram messenger in 2017. According to the lawyer, the SEC's claim against Coinbase is a significant event, because in this case, the agency's charges are not about specific projects, as it was before, but about the platform itself. After the Coinbase case, exchanges are likely to further tighten the rules for listing and issuing tokens on their platforms. “This case will not create a new legal regulation, but it will expand the current one,” the expert concluded.

InDeFi Smart Bank CEO Sergey Mendeleev said he did not understand the criteria by which the SEC classifies a particular token as a security. “Judging by the fact that such questions arise all the time and often several years after listing, there are some problems in definitions. If even the Commission's lawyers can't make up their minds on this issue, it's unclear why Coinbase's legal department should distinguish such things. It is more logical for the Commission to take a closer look at anonymous exchanges that list frankly fraudulent projects and have been known to steal money from users,” the expert explains.

As for the decision of the exchange on the token listing policy, Andrey Tugarin believes that if from the legal point of view the project is legal and does not violate the current legislation, the exchanges have the right to allow tokens of such a project to be listed, even if the assets have little liquidity. It is not the task of lawyers, but of the market to assess and shape the liquidity of tokens.

“Given that the crypto industry is a decentralized and uncontrolled institution, the rules for listing tokens as well as recognizing them as questionable or illiquid will be worked out together, by trial and error. This is certainly an example of digital democracy,” Vladislav Utushkin agrees.

According to Sergey Mendeleev, it makes no sense for large exchanges like Coinbase to offer dubious projects, and with the current regulation any token can be recognized as a security, including, for example, Ethereum. “Let me remind you that [Ethereum chief developer Vitalik] Buterin also conducted ICOs. We don't need such regulation, fellows,” the expert concludes.

Coinbase is considered the leading crypto exchange in the U.S., with the platform's shares traded on NASDAQ. CEO Brian Armstrong owns 59,5% of the company's total shares, even after selling $292 million worth of personal shares. Armstrong is ranked No. 375 on Forbes magazine's list of billionaires. Coinbase shares are trading 80% below their November 2021 peak, coinciding with the bitcoin price hitting an all-time high (ATH).