Coinbase Crypto Exchange Faces Possible SEC Charges, Company Says

Topline

Cryptocurrency exchange Coinbase announced Wednesday it received a notice from the Securities and Exchange Commission warning that regulators have identified possible violations of securities law, in the latest legal snarl for the crypto giant.

Coinbase is facing potential charges for securities violations, the company said Wednesday.

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Key Facts

Coinbase attorney Paul Grewal said in a blog post the SEC sent the company a “Wells notice” warning it of possible violations that could lead to charges, but offered “little more” information, other than telling the company the infractions may involve “an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet.”

Grewal said Coinbase “prepared for this disappointing outcome,” but will continue to operate as normal.

Grewal added, “we are very confident in the way we run our business,” while blasting the SEC for a so-called lack of transparency and criticizing regulation of crypto exchanges in general as lacking direction and clarity.

Shares of Coinbase declined more than 13% in after-hours trading to $67.00 after dropping more than 8% Wednesday to close at $77.14.

The SEC declined to comment.

Crucial Quote

“Our industry continues to see new, conflicting statements from regulators instead of actual rules,” Grewal claimed.

Key Background

Regulators have scrutinized crypto exchanges much more closely as of late after the crash in crypto prices combined with alleged illegal behavior by top industry figures led to a series of high-profile failures, capped by FTX’s collapse in November and the subsequent arrest of founder Sam Bankman-Fried on fraud charges. Coinbase has been under SEC investigation since last summer amid a broader SEC crackdown on unregistered securities, though the company insists none of the crypto products or services it offers can be considered securities—a tightly regulated asset class including traditional investments like stocks and bonds. SEC officials have argued cryptocurrencies should be considered securities since many crypto holders view coins as an investment vessel, rather than a currency to be exchanged. Last month, the crypto crackdown ensnared rival exchange Kraken, which agreed to pay $30 million and stop offering “staking” services—which offer users a return if they allow their crypto assets to be used to validate blockchain transactions—in a settlement with the SEC. The agency accused Kraken of selling unregistered securities, though Coinbase argued this week its staking services shouldn’t count as securities.

Big Number

$100 million. That’s how much Coinbase agreed to pay New York regulators in a January settlement over allegations it let users open accounts without sufficient background checks, which may have encouraged money launderers to use their Coinbase accounts in illicit schemes.

Tangent

Nikhil Wahi, the brother of former Coinbase product manager Ishan Wahi, pleaded guilty last year in the first-even insider trading case involving a crypto firm. Wahi admitted to profiting based on knowledge about coins that Coinbase agreed to list on the exchange before plans were publicly announced.