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The top US securities regulator has sued cryptocurrency platform Coinbase.
Key points:
- Binance is the latest cryptocurrency to be targeted by the US Securities and Exchange Commission
- The industry has argued tokens do not constitute securities and should not be regulated by the SEC
- SEC argues the whole business model is built on 'non-compliance'
It is the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of a crackdown on the industry.
On Monday (local time), the US Securities and Exchange Commission (SEC) took aim at Binance, the world's largest cryptocurrency exchange.
The SEC has accused Binance and its CEO Changpeng Zhao of operating a "web of deception".
If successful, the lawsuits could transform the crypto market by successfully asserting the SEC's jurisdiction over the industry.
In its complaint filed in Manhattan federal court, the SEC said Coinbase had made billions of dollars, since 2019, by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that were securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Coinbase suffered about $US1.28 billion ($1.91 billion) of net customer outflows following the lawsuit, according to initial estimates from data firm Nansen.
Shares of Coinbase's parent Coinbase Global INC closed down $US7.10 ($10.63) or 12.1 per cent at $US51.61 ($77.25) after earlier falling as much as 20.9 per cent.
They are up 46 per cent this year.
Coinbase's Paul Grewal said the company would continue operating as usual and had "demonstrated commitment to compliance".
Broker and exchange crackdown
Securities, as opposed to other assets such as commodities, are strictly regulated and require detailed disclosures to inform investors of potential risks.
Loading...The 1993 Securities Act outlined a definition of the term "security", yet many experts rely on two US Supreme Court cases to determine if an investment product constitutes a security.
SEC chair Gary Gensler said tokens constituted securities and had steadily asserted the SEC's authority over the crypto market, focusing initially on the sale of tokens and interest-bearing crypto products.
More recently, it had taken aim at unregistered crypto broker, dealer, exchange trading and clearing activity.
While a few crypto companies are licensed as alternative system trading systems, a type of trading platform used by brokers to trade listed securities, no crypto platform operates as a full-blown stock exchange.
The SEC also sued Beaxy Digital and Bittrex Global this year for failing to register as an exchange, clearing house and broker.
"The whole business model is built on a noncompliance with the US securities laws and we're asking them to come into compliance," Mr Gensler told CNBC.
Crypto companies refute that tokens meet the definition of a security, saying the SEC's rules are ambiguous, and that it's overstepping its authority in trying to regulate them.
Still, many companies have boosted compliance, shelved products and expanded outside the country in response to the crackdown.
Blockchain Association trade group CEO Kristin Smith rejected Mr Gensler's efforts to oversee the industry.
"We're confident the courts will prove Chair Gensler wrong in due time," she said.
Founded in 2012, Coinbase recently served more than 108 million customers and ended March with $130 billion of customer crypto assets and funds on its balance sheet.
Transactions generated 75 per cent of its $US3.15 billion ($4.71 billion) of net revenue last year.
The SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief.
On Monday, the SEC accused Binance of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform, and misleading customers about its controls.
Binance pledged to vigorously defend itself against the lawsuit, which it said reflected the SEC's "misguided and conscious refusal" to provide clarity to the crypto industry.
Customers pulled about $US790 million ($1.18 billion) from Binance and its US affiliate following the lawsuit, Nansen said.
On Tuesday, the SEC filed a motion to freeze assets belonging to Binance.
Reuters