One day after charging Binance with 13 counts of securities laws violations, the U.S. Securities and Exchange Commission (SEC) has set its sights on Coinbase.

On Tuesday, June 6, the SEC announced that it was suing Coinbase for allegedly operating as an unregistered broker of securities, an unregistered exchange, and an unregistered clearing agency. Further, the SEC claims that Coinbase’s staking program violates the Securities Act.

Today we charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.https://t.co/XPG2gDkxtV pic.twitter.com/hCdVMw8B2v

— U.S. Securities and Exchange Commission (@SECGov) June 6, 2023

The lawsuit

The SEC’s complaint, which dates back to at least 2019, claims that Coinbase has generated billions of dollars by unlawfully facilitating the trading of crypto asset securities. According to the SEC, Coinbase has been operating as an exchange, broker, and clearing agency without obtaining the necessary registrations from the Commission.

These unregistered services provided by Coinbase include acting as a marketplace, bringing together buyers and sellers of securities, executing securities transactions on behalf of customers, and offering facilities for data comparison and settlement of crypto asset securities transactions.

The SEC argues that Coinbase’s failure to register has deprived investors of critical safeguards, such as regulatory oversight, proper recordkeeping, and protection against conflicts of interest. The SEC’s complaint also extends liability to Coinbase’s holding company, Coinbase Global Inc. (CGI), as a control person in relation to certain violations.

SEC Chair Gary Gensler emphasized the significance of Coinbase’s alleged noncompliance, stating, “Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC.” Gensler emphasized the importance of adherence to regulatory standards in protecting the investing public.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, echoed Gensler’s sentiments, noting that Coinbase was fully aware of the applicability of federal securities laws to its activities but deliberately chose not to comply. Grewal emphasized that Coinbase’s actions had potentially harmed investors and emphasized the need to hold the company accountable.

“While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices,” he explained.

The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, seeks injunctive relief, disgorgement of ill-gotten gains with interest, penalties, and other equitable remedies.

28 days to show cause

On the heels of the SEC’s suit came another blow to the marketplace. Together, 10 U.S. states (Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin) have issued a Show Cause Order and a cease and desist order to Coinbase.

Led by the Alabama Securities and Exchange Commission (ASEC), the order gives Coinbase 28 days to “show cause” as to why they should not cease and desist from selling unregistered securities in the state.

“The ASC is committed to protecting Alabama consumers and investors, including those who choose to invest in the decentralized finance space,” ASC director Amanda Senn explained in a press release. “This action is another step toward ensuring that investors in crypto asset products are offered the same protections under our laws and are fully aware of the risks involved in these investments.”

Coinbase (again) requests regulatory framework

The SEC’s lawsuit against Coinbase is only the most recent and prominent example of the legal tussle between the two organizations, with the latter attempting to obtain clear guidance from the SEC regarding securities laws and registration requirements for the past year.

In a July 2022 petition for Rulemaking, Coinbase formally requested that the Commission “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.”

Coinbase, along with other crypto exchanges, feels the regulatory body isn’t acting in good faith, moving the regulatory goalposts each time the exchange meets with them to better come into compliance with the law. This behavior has not gone unnoticed by the U.S. legal system; on June 7, the U.S. Court of Appeals for the Third Circuit stepped in, issuing an ultimatum to the SEC: they have seven days to respond to Coinbase’s July 2022 petition.

Earlier tonight the Third Circuit issued a short order in Coinbase’s mandamus action today. The court noted the SEC’s suit against us this morning and asked the SEC whether that means the SEC has decided to deny our pending petition for rulemaking. The SEC has 7 days to respond. pic.twitter.com/8QXXoHJ07Z

— paulgrewal.eth (@iampaulgrewal) June 7, 2023

In his June 6 D.C. speech, Coinbase’s Chief Legal Officer, Paul Grewal, reiterated the exchange’s (and the wider industry’s) call for a clear regulatory framework for digital assets and the exchanges that host them. He called on Congress to adopt a draft bill — the Digital Assset Market Structure Discussion Draft — that he referred to as “a strong step forward in providing overdue regulatory clarity.”

The proposed bill outlines criteria for classifying digital assets as either securities or commodities, thereby determining the regulatory authority overseeing them. It also addresses the crucial definition of when a network can be deemed “decentralized,” a factor that determines whether an issuer falls under the jurisdiction of the SEC or the Commodity Futures Trading Commission.

“The solution is legislation that allows fair rules for the road to be developed transparently, and applied equally, not litigation,” said Grewal. “Despite today’s complaint, we will continue to operate our business as usual.”

This was a breaking news story and has been updated.