Saturday , July 13, 2024

An Energized Coinbase Prepares to Do Battle With the SEC

Cryptocurrency marketplace and services provider Coinbase Global Inc. says it’s ready to fight the Securities and Exchange Commission if the commission takes an enforcement action against it. But the SEC’s possible action comes as no surprise to some observers of the crypto market.

The SEC last week issued a so-called Wells notice to Coinbase indicating commission staff is likely to recommend some type of civil enforcement action because several Coinbase products may violate federal securities laws. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties,” publicly traded Coinbase said in a regulatory filing.

The action against Wilmington, Del.-based Coinbase is part of a wider SEC effort to force crypto companies, which so far have operated in a mostly unregulated environment, to comply with federal securities rules. It comes in the wake of the spectacular collapse of the big crypto trading firm FTX late last year and problems at other with crypto firms.

While not commenting on issues specific to Coinbase, Cliff Gray, a senior associate at Omaha, Neb.-based The Strawhecker Group who researches cryptocurrency technology, says “the SEC move does not surprise me at all.”

Cryptocurrencies with little to no oversight is the problem,” Gray tells Digital Transactions News. “FTX is the classic case of almost investing in a Ponzi scheme, gone amok.”

Coinbase provides a number of products and services besides its popular exchange. The filing said SEC staff indicated a potential enforcement action could target the company’s spot market, its Coinbase Earn product that enables customers to earn rewards, Coinbase Wallet, and Coinbase Prime, a brokerage service for digital assets.

In a blog post, Coinbase chief legal officer Paul Grewal said the company is ready to fight if need be. “We are prepared for this disappointing development,” Grewal said. “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 and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”

The post further says the SEC hasn’t given the company much information to which it can respond. “The SEC staff told us they have identified potential violations of securities law, but little more,” Grewal said. “We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. [The Wells] notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to.”

An SEC spokesperson declined a request for comment.

Payment technology researcher Aaron McPherson of AFM Consulting Partners says the lack of guidance from Congress about what’s permitted with cryptocurrency has enabled the SEC to go after crypto firms. Thus, he says, he’s not surprised at all about the SEC’s potential action against Coinbase.

“It’s completely in line with their MO so far,” McPherson says. “Their position is that crypto shouldn’t exist.”

The problem with no Congressional guidance, McPherson adds, is that it enables countries with more favorable attitudes toward crypto to get ahead of the U.S. in a growing market. Plus, lack of legal clarity could spur crypto trading to move into unofficial and risky so-called gray markets.

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