The US Securities and Exchange Commission (SEC) has taken legal action against Coinbase, accusing the largest cryptocurrency exchange in the United States of operating unlawfully due to its failure to register with the regulatory authority, as reported by Reuters. This lawsuit follows a similar case brought by the SEC against Binance, the world's largest cryptocurrency exchange, and its founder Changpeng Zhao. These lawsuits are part of SEC Chair Gary Gensler's efforts to establish regulatory oversight over the cryptocurrency markets, which he has referred to as a "Wild West" of investment. Gensler aims to protect investors and rebuild trust in the capital markets amid the rapid growth of digital assets.


During an interview with CNBC, Gensler emphasised the detrimental effect of the cryptocurrency markets on overall capital markets and stressed the need for regulatory intervention.


Coinbase's General Counsel, Paul Grewal, issued a statement expressing the company's commitment to continue operating as usual. Grewal criticised the SEC's enforcement-oriented approach, arguing that the absence of clear rules for the digital asset industry hinders America's economic competitiveness.


Following the SEC's lawsuit, Coinbase Global Inc, the parent company of Coinbase, witnessed a significant decline in its shares. The stock dropped 16.2 per cent to $49.33, reaching a low of 20.9 per cent.


The SEC's complaint alleges that Coinbase has been operating as an intermediary in cryptocurrency transactions since at least 2019, generating substantial revenue. However, the company purportedly evaded disclosure requirements designed to protect investors.


According to the SEC, Coinbase engaged in trading activities involving at least 13 crypto assets that should have been registered as securities. These assets include Solana, Cardano, and Polygon tokens.


Founded in 2012, Coinbase boasts a customer base of over 108 million and holds approximately $130 billion in customer crypto assets and funds as of March. The majority of Coinbase's net revenue, which amounted to $3.15 billion last year, is derived from transaction fees.


The SEC's complaint specifically addresses various aspects of Coinbase's business, including Coinbase Prime, Coinbase Wallet, and the Coinbase Earn staking service. The staking program offered by Coinbase involves pooling customers' crypto assets and using them for activities on the blockchain network, providing customers with rewards while retaining a commission.


The SEC alleges that Coinbase was well aware of its obligations under federal securities laws but deliberately disregarded them. Gurbir Grewal, the SEC's Enforcement Chief, emphasised that rules and regulations cannot be ignored based on personal preferences.


The SEC's lawsuit seeks civil fines, the recovery of unlawfully obtained profits, and injunctive relief. In March, the SEC had previously warned Coinbase about potential securities-related charges.


Coinbase's conflict with Gensler dates back to 2021 when the SEC threatened legal action if the exchange allowed users to earn interest by lending digital assets. Coinbase ultimately abandoned the proposed lending program.


Regarding the Binance case, the SEC accuses the exchange of various wrongdoings, including inflating trading volumes, mishandling customer funds, commingling assets improperly, failing to enforce restrictions on wealthy US customers, and misleading customers about controls and safeguards.


Binance has expressed its strong determination to vigorously defend itself against the SEC's lawsuit and criticised the regulatory authority for failing to provide clear guidance to the cryptocurrency industry, characterising its approach as misguided and consciously refusing to address industry concerns.


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