Coinbase Draws SEC's Ire as Major Exchange Faces Lawsuit
TL;DR Coinbase was served a Wells notice by the SEC on March 22, which means the regulator intends to recommend an enforcement action. Coinbase is standing its ground and is prepared to take legal action if needed. The news has caused the company’s shares to drop 13%.
Among other things, Coinbase’s staking services are in the firing line.
Coinbase has tried to be proactive in showcasing that its staking services are not securities, but it has fallen on deaf ears.
The Securities and Exchange Commission (SEC) has stepped up its policing of the mostly unregulated crypto sector following the high-profile collapse of the FTX exchange, and it does not seem to be slowing down.
Coinbase, an important cryptocurrency exchange in the U.S., was served a Wells notice by the SEC on Wednesday, March 22.
A Wells notice is a formal declaration that the SEC intends to recommend an enforcement action; the same notice was served to Paxos before regulators demanded it stops minting BUSD.
In a statement, Coinbase said the Wells notice regarded “an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet.”
Coinbase and the SEC have had a tumultuous relationship in recent times. Following the regulator’s actions against Kraken and its staking services, Coinbase’s CEO Brian Armstrong stipulated that Coinbase’s staking services were not securities.
In fact, Coinbase’s defense of its staking services was ramped up just a day before the Wells notice was served. The exchange sent the SEC an 18-page petition discussing securities law treatment of services related to validating proof-of-stake protocols.
An Uphill Battle
The Irony of seeking legal clarity and a functional regulatory framework for operating crypto in the U.S. only to be served with a threat of legal action is not lost on the exchange. Coinbase’s announcement of the Wells notice is titled: “We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead.”
Moreover, it has emerged that Coinbase asked the SEC to outline which specific tokens were being contested as securities, and the SEC refused.
CEO Armstrong has said before that crypto services in the U.S. need a clear rulebook to adhere to rather than ambiguous and convoluted attempts at policing.
Until there is a legal framework, or rulebook, crypto businesses in the U.S. will have to contend with hardline legal policing. However, according to the release from Coinbase, the company is ready to fight in court.
“We are prepared for this disappointing development. We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for,” the statement read.
On the Flipside
Despite Coinbase’s intention to battle the SEC, confidence from investors in the company has been rattled as its shares dropped nearly 13% to $67.33 in extended trading after the news.
Why You Should Care
Coinbase has been transparent with its intentions to be as compliant as possible, working alongside the SEC and other regulators to stay on the right side of the law. However, the company’s frustrations are starting to show as the U.S. regulatory environment continues to be hostile.
Read more about Coinbase’s frustrations with the SEC:Coinbase’s Brian Armstrong Joins Ripple CEO in Chastising SEC’s Approach to Crypto
Read more about how Texas wants to become a hub for Bitcoin users: Texas Bill to “Welcome the Bitcoin Economy” to Lone Star State