SEC Initiates Lawsuit Against Coinbase Amid Rising Regulatory Pressure on Cryptocurrency Sector

The Securities and Exchange Commission (SEC) has taken legal action against Coinbase Global (COIN), the leading cryptocurrency exchange in the United States, as part of its escalating efforts to regulate the crypto industry.

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The SEC alleges that Coinbase violated securities laws by operating as an unregistered exchange, broker, and clearing agency. Furthermore, the commission claims that Coinbase conducted the sale of securities without proper registration.

Coinbase's legal woes began shortly after the SEC filed a lawsuit against Binance, the world's largest crypto exchange, for similar violations of securities laws, as well as mishandling customer funds and misleading investors.

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Paul Grewal, Coinbase's Chief Legal Officer, responded to the lawsuit, criticizing the SEC's reliance on enforcement actions without clear regulations for the digital asset industry. Grewal argued that this approach undermines the competitiveness of American businesses like Coinbase, which have demonstrated a strong commitment to compliance.

Following the news of the lawsuit, Coinbase's stock plummeted over 15% on Tuesday, dragging down the broader cryptocurrency market. Bitcoin also experienced a 4% decline in the past 24 hours, reaching $25,680 as of Tuesday 8 am Eastern Time. During the same period, the total market capitalization of crypto assets decreased by 3.8%. Other cryptocurrency-related stocks, including Riot Platforms Inc., Marathon Digital, and Hut 8 Mining, also suffered losses on Tuesday.

The legal battles between regulators and the crypto industry have become increasingly high-profile in recent times. Since the beginning of the year, the SEC has charged 14 crypto actors with violating securities laws. In February, Kraken, another US-based crypto exchange, settled with the SEC, paying a $30 million fine for its alleged failure to register its crypto asset staking program.

Mark Palmer, a senior equity research analyst at Berenberg Capital Markets, predicts that the SEC's crackdown on the crypto industry will continue unabated. These ongoing legal conflicts will play a crucial role in determining the regulatory landscape for cryptocurrencies in the US, particularly in defining whether specific digital currencies should be classified as commodities or securities, falling under the purview of the Commodity Futures Trading Commission (CFTC) or the SEC.

In an attempt to establish regulatory clarity, House Financial Services Committee Chair Patrick McHenry and House Agriculture Committee Chair Glenn Thompson recently introduced a draft discussion bill. This bill aims to bridge the regulatory gaps between the CFTC and the SEC, outlining registration requirements for firms and mandating the SEC to develop tailored rules to govern cryptocurrencies.

The reputational damage to Coinbase and Binance could be significant as a result of these legal battles, potentially eroding trust among users and investors. Mikkel Morch, Chairman and Director of crypto hedge fund ARK36, suggests that the consequences may include hefty fines, potential shutdowns of Binance's US entity, and increased scrutiny in other jurisdictions.

The SEC's complaint against Coinbase asserts that the company offered certain crypto assets as securities, thereby falling within the SEC's jurisdiction. SEC Chair Gary Gensler highlighted Coinbase's alleged failures, which deprived investors of essential protections against fraud and manipulation, such as proper disclosure, safeguards against conflicts of interest, and routine SEC inspections. Similar allegations were made in the case against Binance and its founder Changpeng Zhao.

With the SEC now identifying a total of 19 crypto tokens listed on Binance and Coinbase as securities, other exchanges in the US market may face pressure to delist these assets or risk regulatory action from the SEC.

The regulatory scrutiny and uncertainty surrounding the crypto industry have significantly dampened investor enthusiasm. JPMorgan reports a 40% decline in total crypto market volume across exchanges in April, followed by an additional 25% decrease in May. According to Kenneth Worthington, an analyst at JPMorgan, these regulatory risks, particularly in the US, are contributing to the decline in token prices and overall activity levels in the industry. The lack of significant positive developments and ongoing SEC pressure have negatively impacted investor sentiment.

Also Read: Breaking News: Coinbase to Discontinue Bitcoin Borrow Service