SEC Alleges Coinbase Violated Security Laws, Delivers Wells Notice

This Wednesday, the Securities and Exchange Commission delivered a Wells notice to Coinbase warning of an impending enforcement action due to alleged securities laws violations. The exchange’s CEO stated that the notice is mostly focused on staking and asset listings, while its Chief Legal Officer revealed that it came after 30 meetings with the regulators over the previous nine months.

Coinbase’s shares dropped more than 10% in after-hours trading after the news broke.

SEC Warns Coinbase of Incoming Enforcement Actions

On Wednesday, March 22nd, Coinbase received a Wells notice from the SEC alleging the exchange is in violation of securities laws. A blog post published soon after revealed that the allegations are mostly aimed at the company’s staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. Coinbase also stated it was prepared for the development and expressed its willingness to defend itself in court.

In his Twitter thread, the company’s CEO Brian Armstrong highlighted Coinbase’s rigorous approach when it comes to which assets get approved. He also stated that the upcoming legal process will provide “an unbiased body where we will be able to make clear for all to see that the SEC simply has not been fair, reasonable, or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets.”

Coinbase’s Chief Legal Officer expressed disappointment that despite the exchange’s relentless efforts and 30 meetings with the Commission over the past nine months, the SEC proved more willing to resort to an enforcement action rather than engaging with the industry in a more constructive manner. 

Both executives singled out the approval to go public the company received from the SEC several years prior as proof that it is not in violation of any laws, and as proof that the SEC is moving the goalpost as it sees fit when it comes to what is deemed acceptable. In light of recent interviews given by Gary Gensler, and Armstrong’s statement that the Commission may be moving to fully ban staking in the US, today’s Wells notice, perhaps, isn’t entirely surprising.

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Is The SEC Really Going After Crypto Staking as a Whole?

The alleged targeting of Coinbase’s staking service is notable for several reasons. On the one hand, after SEC’s settlement with Kraken over its staking was revealed, Coinbase went on the record stating their offering is entirely different and not in danger of an enforcement action. At the same time, however, Gary Gensler gave an interview in which he stated both that the cryptocurrency industry is, in general, not compliant, and that staking services, no matter what they are called, are the same in the eyes of his agency.

The SEC’s approach has, however, been widely criticized as overly aggressive. One of the agency’s Commissioners, Hester Peirce, called the tactic of enforcement first “lazy and paternalistic” in her “Kraken Down” statement on the settlement with the exchange. The SEC has also been accused of actively avoiding constructive conversations with representatives of the cryptocurrency industry, with many pointing toward Coinbase’s numerous efforts to build a better regulatory framework.

On the other hand, as the recent hearing of the Congressional Subcommittee on Digital Assets demonstrated, Gensler’s approach has many supporters among lawmakers. The support goes to the point of some suggesting that the debate on whether certain digital assets are securities or commodities is entirely futile and that they should all be placed under SEC’s jurisdiction, regardless of the classification. Furthermore, the Commission has itself responded, on multiple occasions, that the reason why cryptocurrency companies can’t get approval isn’t that the regulatory environment is hostile toward them, but that they are simply not willing to put in the work needed to become compliant.

Editorial note (March 22nd, 2023, 6:53 PM EST): The article was expanded to include Coinbase’s statement, as well as the comments from its CEO Brian Armstrong and CLO Paul Grewal. It was also expanded with additional context including recent regulatory actions, SEC’s statements and comments, as well as the comments on the wider cryptocurrency industry made at the recent hearing of the Subcommittee on Digital Assets that relate to the topic.

Do you think Coinbase is violating securities laws in any capacity? Let us know in the comments below.