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SEC Warns Of Potential Securities Charges Against Coinbase

March 23, 2023
minute read

The Securities and Exchange Commission sent a Wells notice to cryptocurrency exchange Coinbase alerting it to potential securities law breaches.

Following the news's release on Wednesday, Coinbase shares dropped by almost 12% in after-hours trading, adding to a loss of 8.16% in normal trade.

In a regulatory filing, Coinbase stated that it believed these prospective enforcement actions would involve elements of the company's spot market, staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. The potential civil lawsuit might ask for disgorgement, civil penalties, and injunctive relief.

The SEC has stepped up its enforcement against the cryptocurrency market, cracking down on businesses and initiatives that it claims were peddling unregistered securities. In mid-2022, the first rumors of an SEC investigation into Coinbase appeared.

Rising interest rates and a general flight from risk rocked the crypto markets months before FTX collapsed in November, contributing to the failure of stablecoin Terra, the demise of the crypto hedge fund Three Arrows Capital, and the collapse of the exchanges Celsius and Voyager.

Typically, a Wells notice is one of the last actions taken before the SEC formally files charges. It generally lays out the foundation of the regulatory defense and gives the person who might be charged the chance to refute the SEC's allegations.

Coinbase called the probe "cursory" and said that the Wells notification contained only scant details about possible infractions.

Coinbase Chief Legal Officer Paul Grewal wrote in a blog post, "Although we don't take this development lightly, we are highly confident in the way we conduct our business - the same business we represented to the SEC in order to qualify as a public company in 2021.

The company stated that the exchange's offerings would keep going normally up until the conclusion of any legal proceedings.

Executives at Coinbase, including its founder and CEO Brian Armstrong, have resisted what they see as SEC overreach towards the cryptocurrency industry following the demise of FTX. SEC chair Gary Gensler directed the agency to take enforcement action against a number of power players, including Gemini, Genesis, TRON CEO Justin Sun, Do Kwon, and cryptocurrency exchange Kraken.

Grewal said in a statement, "We are ready for this unfortunate outcome and secure in the legitimacy of our assets and services. "If necessary, we welcome a trial system to provide the clarification we have been promoting and to show that the SEC has blatantly been unfair or unreasonable in its interaction on digital assets," the statement continued.

Stablecoin issuer Paxos received a Wells notice from the SEC in February. During that time, a Paxos spokesperson told Trade Algo, "We will communicate with the SEC staff on this topic and are prepared to robustly litigate if required."

Grewal stated that Coinbase wants stronger regulatory certitude.

He answered, "Give us the regulations, and we'll abide by them. We will register the areas of our company that require registration if you give us a real route to do so.

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