Coinbase, the biggest cryptocurrency platform in the US, was sued by the US Securities and Exchange Commission (SEC) on Tuesday, June 6, for allegedly doing business illegally due to its failure to register as an exchange.
Attempt to Regulate Crypto Industry
After Binance, this is the second time SEC has sued another major crypto exchange.
Both lawsuits are part of SEC Chair Gary Gensler's effort to exert control over cryptocurrency markets in order to safeguard investors and restore faith in the financial system.
Gensler told CNBC that the cryptocurrency markets were undermining that trust, adding that this threatened the stability of the financial system as a whole.
Companies in the cryptocurrency space, notably Coinbase, have complained that the SEC is overreaching by claiming authority over the sector.
Coinbase's general counsel, Paul Grewal, issued a statement reassuring customers that the firm would go on as normal and has a "demonstrated commitment to compliance." Coinbase is being accused of breaking securities laws with its staking incentives scheme by ten states in the US, led by California.
The statistics company Nansen said that within a few hours of the SEC filing, Coinbase clients withdrew almost $57 million.
SEC vs. Coinbase
On Tuesday, June 6, the SEC filed a complaint seeking civil damages, restitution of ill-gotten income, and injunctive relief.
According to Reuters, the SEC has filed a lawsuit in federal court in Manhattan alleging that Coinbase has avoided disclosure rules designed to safeguard investors while earning billions of dollars as a middleman on crypto trades since at least 2019. At least 13 tokens (including Solana, Cardano, and Polygon) that the SEC considers securities were traded on Coinbase without proper registration.
Coinbase, which has been around since 2012, has more than 108 million clients and had $130 billion in cryptocurrencies and consumer cash as of the end of March. About 75% of its $3.15 billion in net revenue from last year came from transactions.
About 3.5 million users participate in Coinbase's staking rewards program, in which the exchange pools crypto assets and utilizes them to fuel blockchain network activity in return for "rewards" it sends consumers after deducting a fee.
The states of Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin are major players in this initiative. Because of its unregistered securities sales, Coinbase was hit with a $5 million penalty in New Jersey.
Back in March, Coinbase received a warning from SEC, indicating possible future legal action. "You simply can't ignore the rules because you don't like them or because you'd prefer different ones," said SEC Enforcement Chief Gurbir Grewal in a statement.
The crypto sector has responded to Gensler's crackdown by increasing compliance, shelving products, and going global.
Kristin Smith, CEO of the trade organization Blockchain Association, shot down Gensler's attempts to regulate the blockchain business. She reassured everyone that the courts would eventually prove Gensler wrong.
