​SEC notifies Coinbase of securities law violation

What’s new? Crypto exchange Coinbase has received a Wells notice about possible violations of securities laws from the US Securities and Exchange Commission (SEC). It concerns certain aspects of the platform’s operations, including the unspecified digital asset segment, as well as Coinbase Earn, Coinbase Prime, and Coinbase Wallet staking services. According to the blog, the exchange’s products and services will continue to operate as usual for now. Coinbase’s chief legal officer Paul Grewal stated that the company is “prepared for this disappointing outcome,” but is confident in the legality of its assets and services and is ready to defend them in court. The company stressed that it had previously asked the SEC to clarify its rules for working with cryptocurrencies, but instead received threats from the court.

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Wells is a formal notice from the SEC in writing. It is sent after an investigation into possible violations of the law is completed and informs the recipient of the agency’s plans to take enforcement action.

What is the exchange’s position? Coinbase claims that the tokens listed on the exchange are not securities, and the company conducts thorough due diligence before listing. Grewal previously explained in detail why the exchange’s staking service is not an offering of securities, pointing out that the characteristics of the service do not meet the definition found in US law.

This is not the first time Coinbase has received a Wells notice. In 2021, the SEC said it considered the Lend product, which would allow users to earn interest for lending their cryptocurrencies, to be a security. The exchange later declined to launch it.

Coinbase’s executives expressed disappointment with the SEC’s approach, saying they tried to cooperate in good faith. They have met with commission officials more than 30 times in the past nine months to resolve potential problems, but the talks have yielded no results, the company said in a blog post. The company also cited uncertainty about how the commission’s rules apply to digital asset trading platforms.

SEC and cryptocurrencies. Since the beginning of the year, the crypto industry has been rocked by an increase in SEC enforcement actions. In February, the regulator ordered the Kraken exchange to stop providing staking services to Americans, and Paxos received a Wells notice that the Binance USD (BUSD) stablecoin it was issuing was an unregistered security. At the same time, the issuance of the asset had previously been terminated by the New York authorities. The SEC also accused the founder of blockchain TRON and exchange Huobi Justin Sun of market manipulation in the sale of tokens TRX and BTT, launched an investigation into the exchange SushiSwap and opposed the sale of assets of bankrupt broker Voyager to the exchange Binance.US. However, the court approved the latter over the commission’s objections.

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In addition, the SEC identified several tokens on Coinbase as securities in an insider trading case involving its former employee. Although Coinbase has not been sued in the case, the SEC is conducting a separate investigation into the company in connection with the listing of a number of assets.