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Business|Coinbase Accused of Breaking Market Rules as Crypto Crackdown Widens

https://www.nytimes.com/2023/06/06/business/sec-coinbase-lawsuit-cryptocurrency.html
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CRYPTOCURRENCY

 * Crypto Terms to Know
 * A Guide to Digital Currency
 * Crypto Businesses, Explained

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COINBASE ACCUSED OF BREAKING MARKET RULES AS CRYPTO CRACKDOWN WIDENS

The S.E.C. said the cryptocurrency platform allowed users to trade unregistered
securities, a day after it accused the crypto platform Binance of mishandling
funds.

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The Securities and Exchange Commission sued Coinbase, the largest cryptocurrency
trading platform in the United States, on Tuesday.Credit...Gabby Jones for The
New York Times


By Matthew Goldstein, Ephrat Livni and Emily Flitter

June 6, 2023Updated 4:38 p.m. ET

In an intensifying effort to end what the authorities see as the era of
lawlessness in the cryptocurrency market, the Securities and Exchange Commission
on Tuesday sued Coinbase, the largest crypto trading platform in the United
States, claiming that the company broke the law by not registering as a broker.

The S.E.C., the nation’s top securities regulator, filed the lawsuit a day after
it accused Binance, the world’s biggest cryptocurrency trading exchange, of
mishandling customer funds and lying to American regulators and investors about
its operations.

With these federal actions against major crypto companies, along with other
lawsuits at the state level, regulators have sought to reshape the crypto sector
by treating digital asset exchanges like more traditional financial firms, while
pushing out individuals and companies that they view as bad actors.

In its filing on Tuesday, the S.E.C. detailed the ways in which Coinbase’s
leaders had demonstrated that they knew how the marketing and sale of digital
assets should be governed under U.S. laws, even while failing to follow them.



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“Coinbase has elevated its interest in increasing its profits over investors’
interests, and over compliance with the law and the regulatory framework that
governs the securities markets and was created to protect investors and the U.S.
capital markets,” the filing said.

Coinbase went public in April 2021, an event seen as a milestone in crypto’s
march into the mainstream. The company handled $830 billion worth of trades last
year, with nearly nine million users making at least one trade per month.

The S.E.C. said Coinbase had made billions easing the sale of crypto assets but
deprived investors of significant protections. Its complaint, filed in federal
court in Manhattan, claims that the company operated as an unregistered exchange
even though it told investors in going public that regulators might deem some of
the products traded on its platform to be securities.

Coinbase has argued that its business model got tacit approval from the S.E.C.
when the agency approved its initial public offering. The company has said it is
willing to work with the S.E.C. but does not agree with its position that all
digital assets offered on its trading platform must be registered securities,
which require more strict oversight.

The action is consistent with the S.E.C.’s long-held view that most crypto
products are no different from stocks, bonds and other securities. That means
the firms that operate as exchanges and provide a platform for trading and
selling crypto products must be registered like any exchange or brokerage that
facilitates stock or bond trading.



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“You simply can’t ignore the rules because you don’t like them or because you’d
prefer different ones: The consequences for the investing public are far too
great,” Gurbir S. Grewal, the director of the S.E.C.’s enforcement division,
said in a statement.



Executives in the crypto industry, which has reveled in challenging the rules
and operating outside the heavily regulated confines of the mainstream finance
industry, have often argued that digital assets are different and that many of
the rules for stocks should not apply.

“The S.E.C.’s reliance on an enforcement-only approach in the absence of clear
rules for the digital asset industry is hurting America’s economic
competitiveness,” Coinbase’s chief legal officer, Paul Grewal, said in a
statement about the suit.

“The solution is legislation that allows fair rules for the road to be developed
transparently and applied equally, not litigation,” added Mr. Grewal, who is not
related to the S.E.C. enforcement officer.

“The message here is that regulatory clarity already exists when it comes to
exchanges and broker dealers,” said John Reed Stark, a former S.E.C. enforcement
lawyer and regulatory consultant.



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Adding to Coinbase’s legal troubles, securities regulators in 10 states,
including Alabama, California, Illinois and New Jersey, filed their own actions
on Tuesday seeking to stop the company from selling unregistered securities to
investors in their states.

The state regulators said Coinbase must first register to offer those products
in their states. Some states, like New Jersey, imposed fines on the company.

The S.E.C. suit and the actions by state regulators against Coinbase touched on
a crucial issue that many in the crypto industry have said Congress must
address: whether digital asset products are securities or something totally
different.

The S.E.C. has said the test to determine whether a crypto product should be
treated like a security is derived from a 1946 Supreme Court case that led to
what is known as the Howey test. The S.E.C. chair, Gary Gensler, has often said
that this standard is clear and that no new laws are needed to determine whether
a digital asset is a security. The industry, however, has begged to differ.

The S.E.C. complaint took issue with Coinbase’s claims that it was fully
compliant with applicable securities laws before offering new digital products
for trading, dismissing them as “lip service.”



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According to the 101-page complaint, “Coinbase has for years made available for
trading crypto assets that are investment contracts under the Howey test and
well-established principles of the federal securities laws.”

The suit, long anticipated by Coinbase, comes as its executives and others in
the crypto industry hope to shift the narrative about digital assets. Mr. Grewal
of Coinbase testified before a House committee on Tuesday about a draft bill
regulating crypto. Coinbase has said it welcomes regulation and wants to
cooperate with the S.E.C.

The S.E.C. lawsuit is the latest enforcement in a multiyear crackdown on the
crypto market by the regulator, which has picked up steam after the collapse of
the FTX cryptocurrency exchange in November and criminal charges against its
founder, Sam Bankman-Fried.

The lawsuit against Coinbase notably did not include an allegation of fraud,
like the complaint against Binance, or a request for a preliminary injunction
against the company. The S.E.C. on Monday also sued Binance’s founder and chief
executive, Changpeng Zhao. On Tuesday, it did not similarly sue Coinbase’s chief
executive, Brian Armstrong.

Coinbase, unlike Binance, does not issue its own crypto tokens, and the company
has argued that its status as a publicly listed company ensured that it followed
strict rules about its operations.



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The company petitioned the S.E.C. for new rules last summer and even sued the
agency for failing to act on its request in April.

The flurry of legal actions against Coinbase, and the crackdown on the crypto
industry in general, have weighed on the company’s stock price. Shares of
Coinbase have fallen roughly 20 percent in the past two days.



Matthew Goldstein covers Wall Street and white-collar crime and housing issues.
@mattgoldstein26

Ephrat Livni reports from Washington on the intersection of business and policy
for DealBook. Previously, she was a senior reporter at Quartz, covering law and
politics, and has practiced law in the public and private sectors.   @el72champs

Emily Flitter covers finance. She is the author of “The White Wall: How Big
Finance Bankrupts Black America.” @FlitterOnFraud

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