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SEC sues Coinbase, accuses crypto platform of breaking market rules

The Securities and Exchange Commission on Tuesday sued Coinbase, the largest cryptocurrency trading platform in the United States, alleging that the company broke securities laws by not registering as a broker.

The lawsuit came a day after the country’s top securities regulator accused the world’s largest cryptocurrency trading exchange of mismanaging customer funds and lying about its operations to US regulators and investors.

The regulator’s actions against the two major crypto companies reflected a wider effort by US authorities to usher in what they see as an era of chaos in the industry. With these and other lawsuits, the SEC has sought to reshape the crypto sector, aligning digital asset exchanges with more traditional financial firms like securities dealers, while pushing out the individuals and companies it regards as bad actors. is seen.

In Tuesday’s filing, the SEC detailed the ways Coinbase leaders demonstrated they knew how the marketing and sale of digital assets should be governed under US laws, even though they failed to comply.

“Coinbase has put its best interests at the expense of investors to maximize their profits and comply with the law and regulatory framework governing the securities markets,” the filing said.

The complaint, filed in Manhattan federal court, claimed that Coinbase operated as an unregistered exchange, even though it publicly disclosed to investors how it was operating and some of the products traded on its platform. can be understood. Securities to be regulated by regulators.

The SEC said Coinbase made billions facilitating the sale of crypto assets by masquerading as an unregistered exchange, but deprived investors of vital protections.

SEC’s director of enforcement, Gurbir S. “You can’t ignore the rules because you don’t like them or you prefer differently: the consequences for the investing public are enormous,” Grewal said. said in a statement.

The action is in line with the SEC’s long-standing view that most crypto products are no different from stocks, bonds and other securities and must comply with US laws. This means that companies that act 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.

“The SEC’s reliance on an enforcement-only approach in the absence of clear regulations for the digital asset industry is harming America’s economic competitiveness,” said Paul Grewal (no relation to SEC Enforcement Director), Coinbase Chief Legal Officer, in a statement. Is.” trial. “The solution is legislation that allows fair rules for the road to be transparently developed and uniformly enforced, not litigation,” he said.

Crypto industry executives, who are happy to challenge rules and operate outside the heavily regulated confines of the mainstream finance industry, have often argued that digital assets are different and that many of the stricter regulatory rules should not apply to stocks.

“The message here is that regulatory clarity is already in place when it comes to exchanges and broker-dealers,” said John Reed Stark, former SEC enforcement attorney and regulatory consultant.

The lawsuit against Coinbase touches on an important issue that many in the crypto industry say must be addressed by Congress.

The SEC has said that the test to determine whether a crypto product should be treated like a security is derived from a 1946 Supreme Court case, which led to what is known as the Howey test. SEC Chairman Gary Gensler has often stated that this standard is clear and no new legislation is needed to determine whether a digital asset is a security. However, the industry begs to differ.

The SEC 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”.

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

The lawsuit against Coinbase, long anticipated by the company, comes as its executives and others in the crypto industry are hoping to shift the narrative about digital assets. Mr. Grewal of Coinbase is set to testify before a House committee on Tuesday about a draft bill regulating crypto. Coinbase has said it welcomes the regulation and looks forward to cooperating with the SEC.

The SEC lawsuit is the latest in a multi-year crackdown on the crypto market by the regulator, which has picked up steam following the collapse of the FTX crypto currency exchange in November and criminal charges against its founder Sam Bankman-Fried.

The lawsuit against Coinbase did not specifically include allegations of fraud, like the complaint against Binance. The SEC also sued Binance founder and CEO Changpeng Zhao on Monday. On Tuesday, it did not sue Coinbase CEO 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 ensures that it adheres to strict regulations regarding its operations.

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

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