The Securities and Exchange Commission (SEC) has issued a Wells notice to Coinbase, signalling that charges may be brought against the US exchange. Although the nature of the potential violations of securities law were not specified, the SEC could target Coinbase as part of its bid to scrutinise proof-of-stake cryptocurrencies. SEC Chairman Gary Gensler previously suggested proof-of-state cryptos could be securities. The SEC secured a victory over Kraken in February on this issue, forcing it to ditch its staking services and pay a $30m fine. Coinbase has responded by moving to unchain staking for a number of assets and may face a multi-million dollar fine.
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SEC Moves to Take on Coinbase and its Implications for the Crypto Industry
The Securities and Exchange Commission (SEC) is gearing up to take on Coinbase, the biggest and best-known U.S. cryptocurrency exchange, in what could be a never-ending lawsuit. The lawsuit will have profound consequences for the entire crypto industry, especially with the markets swallowing last week’s Fed rate hike.
The SEC served a Wells notice to Coinbase, signalling its intent to bring charges against the exchange. However, in true SEC style, the agency did not specify what those charges might be, although Paul Grewell, Coinbase’s Chief Legal Officer, gave some details in a subsequent blog post.
The Wells notice does not provide a lot of information for us to respond to. The SEC staff told us they have identified potential violations of securities law but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so.
The news was met with great concern by the crypto community, but was it a coincidence that the SEC fired this opening salvo in Coinbase’s direction just as it was actively working to debunk the crypto industry in the United States?
It is possible that the SEC is going after Coinbase as part of its wider crusade against proof-of-stake cryptocurrencies. SEC chairman Gary Gensler recently suggested that proof-of-state cryptos could be securities and the SEC scored a significant victory on this front when Kraken agreed to stop offering its staking services and pay a $30 million fine.
If the SEC is successful in its arguments that most cryptos besides Bitcoin are securities, what does that mean for the crypto industry in the United States? It could be the end of days for crypto or a great big nothing burger.
Let’s take a closer look at what might happen if an altcoin is officially designated as a security. For instance, let’s create a fictional crypto, Guy Coin. Guy Coin is issued by Guy Technologies, a for-profit company based in the US, and its development is overseen by the Guy Foundation, a non-profit based in Switzerland.
If the SEC wins its case against Guy Technologies, it will be designated as a security, and Guy Technologies will be on the hook for selling it as an unregistered security. Three sets of stakeholders will be directly impacted: Guy Technologies, the exchanges selling the coin (those based in the US), and those people who bought Guy Coin.
Guy Coin will likely be delisted from all US exchanges, and Guy Technologies will need to pay an eye-watering fine to the SEC for selling Guy Coin as an unregistered security, maybe in tens or hundreds of millions of dollars.
Guy Technologies will have two options: (1) accept that Guy Coin cannot be sold to US investors or (2) jump through the necessary hoops to make it available as a registered security. Neither option is ideal, as unregistered securities are subject to strict limitations on whom they can be sold to, while registering Guy Coin could take time and may not immediately bear fruit.
In conclusion, if the SEC wins its case against Coinbase and other altcoins, it could have a profound impact on the crypto industry in the US. It remains to be seen what will happen, but one thing is certain – the war against crypto in the United States is dragging more and more entities into the maelstrom, and the SEC clearly isn’t afraid of going after the big players. We can only hope that the lawyers are up for being paid in crypto.
