Coinbase said it wants its day in court against the Securities and Exchange Commission after an announcement that the regulator is mulling charges relating to the crypto exchange’s staking and wallet services.
“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,” Coinbase’s Chief Legal Officer Paul Grewal said on its website on Wednesday.
The comment was part of his announcement that the exchange had been served a Wells notice, a tool the SEC uses to notify companies they are recommending enforcement actions for possible violations of securities regulation.
The US regulator’s crackdown shows no sign of abating. SEC Chair Gary Gensler has been ratcheting up enforcement actions against the crypto industry since January. This, plus banking regulators’ efforts to limit banks’ relationships with crypto, has led to fears that regulators are choking the industry.
Over the past 9 months, CB has met with the SEC more than 30 times, sharing details of our business to build a path to registration. During this time, the SEC hasn't given basically 0 feedback on what to change, or how to register. Instead, today we received a Wells notice. 2/15— paulgrewal.eth (@iampaulgrewal) March 22, 2023
“Coinbase has spent an extraordinary amount of time and resources working in good faith to seek regulatory clarity from the SEC,” Jake Chervinsky, chief policy officer at the Blockchain Association, tweeted.
“The idea that they’d be rewarded with nothing but a Wells notice is sad, but not surprising from an agency best known for regulating by enforcement.”
The possible action follows an investigation by the SEC that has been ongoing since around last summer, Grewal said in the disclosure.
He said the exchange had met repeatedly with the SEC over a period of nine months and developed a registration path for Coinbase assets.
In return, it had got no clarity from the commission and is facing an enforcement action, Grewal said.
Gensler has signposted that he sees almost all crypto assets – barring Bitcoin – to be securities, and therefore under his purview. Industry players say they are caught in an impossible situation, however: the commission tells them they can just “come in and register” their assets, but the registration process proves impossibly complicated.
Coinbase has always been adamant that it does not list securities, nor offer any kind of product to customers that could be considered a security.
Coinbase is the US’s largest crypto exchange by trading volume, and went public in 2021. As part of the listing process, it had to demonstrate compliance with SEC rules.
Wells notices don’t necessarily lead to legal action.
The SEC isn’t guaranteed to find judges on its side if the Coinbase action winds up in court. As Grewal pointed out, a federal judge in the recent Voyager case implied that the commission’s claim that cryptocurrencies are securities was not backed with any legal certainty.
A judgement is expected very soon in the SEC’s high-profile case against Ripple. The regulator accused Ripple of failing to register XRP as a security. Crypto lawyers are optimistic that Ripple could win this case.
“The Ripple case just became a lot more important. Depending on how it comes out, it could make the SEC’s job versus Coinbase much, much more complicated,” Bill Hughes, senior counsel at Consensys, tweeted.
Some are more sceptical.
“Coinbase presents a veritable drivers’-ed film of securities violations,” cybersecurity expert and academic John Reed Stark tweeted.
And while the SEC action hammered the stock – Coinbase slumped 8% yesterday and is down more than 10% in premarket New York trading – they have soared a whopping 130% this year.
Ark’s Cathie Wood this week dumped more than 160,000 Coinbase shares from her Ark Invest fund this week, worth some $13.5 million. Short-seller Jim Chanos is among investors who have made a bearish case against the company.