Coinbase is being sued by the SEC

Illustration by Alex Castro / The Verge

After months of indications the US Securities and Exchange Commission (SEC) would sue US crypto giant Coinbase, it’s finally happened.

The lawsuit (1:23-cv-04738) filed Tuesday in the Southern District of New York accuses Coinbase and its parent company, CGI, of breaking securities law by acting as an unregistered broker for its main crypto trading platform, its Coinbase Prime product, and the Coinbase Wallet. In addition to those alleged violations, the SEC is suing over Coinbase’s staking-as-a-service platform that allows its customers to earn a return for participating in “proof of stake” blockchains.

The Alabama Securities Commission also issued a “show cause” order to Coinbase on Tuesday morning, saying “The action is the result of a multi- state task force of ten state securities regulators that includes Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.” That asks Coinbase to respond within 28 days explaining “why they should not be directed to cease and desist from selling unregistered securities in Alabama.”

Coinbase chief legal officer and general counsel Paul Grewal responded to the lawsuit with this statement provided to The Verge:

The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual,

After the SEC sent Coinbase a “Wells notice” in March indicating enforcement action to follow, Grewal wrote in a blog post, “Coinbase does not list securities or offer products to our customers that are securities … We remain 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 when it comes to its engagement on digital assets.”

This filing drops one day after the SEC sued the world’s largest crypto exchange, Binance, saying it illegally operated in the US (among many, many other things detailed here). Reuters reports that data firm Nansen tracked over $790 million pulled from Binance and its US affiliate since that lawsuit was filed.

There are 13 tokens named by the SEC that it says Coinbase “has made available for trading crypto assets that are being offered and sold as investment contracts, and thus as securities.” Among them are tokens for Solana (SOL), the Axie Infinity game (AXS), the Polygon blockchain (MATIC), virtual world The Sandbox (SAND), and the “Chiliz” (CHZ) token operated by fan token company Socios.

In a statement, SEC chair Gary Gensler said, “We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions.”

Gesler continued, “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. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections.”

In an interview aired on Bloomberg, Gensler questioned the value of the tokens, saying crypto companies are operating in “a wild west, with a bunch of casino operators.”

Update June 6th, 10:38AM ET: Added response from Coinbase and additional comments from Gensler.

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