Coinbase is facing a major challenge — one that could affect all of crypto
Amidst a crypto industry trying to catch its breath after months of falling digital currency prices, a bomb may be ready to explode.
The market has lost more than $2 trillion due to a market-shaking combination of recession fears, which have prompted investors to liquidate their positions in all risky asset classes, and scandals affecting crypto lenders.
These scandals caused a liquidity crisis and bankruptcy filings for the Celsius Network and Voyager Digital platforms.
But now the crypto industry will also have to deal with another serious threat: the US Securities and Exchange Commission.
The crypto sector has long called for clear rules, and regulators have not fully responded. Now the agency has turned its attention to one of crypto’s biggest players, and that has implications for the entire sector.
The SEC has opened an investigation
According to Bloomberg News, the SEC is investigating Coinbase (COIN) – Get Coinbase Global Inc Report.
The investigation, which has not been made public, focuses on the listing of digital assets that should have been registered as securities. The inquiry follows insider trading charges filed last week against a former Coinbase product manager, Ishan Wahi.
“[We] are confident that our rigorous due diligence process — a process the SEC has already undergone — keeps securities off our platform, and we look forward to working with the SEC on the matter,” Coinbase Chief Legal Officer Paul Grewal said on Twitter.
He captioned the tweet: Coinbase doesn’t list securities. End of story.
“The SEC does not comment on the existence or non-existence of a possible investigation,” a spokesperson told TheStreet in an emailed statement.
Insider trading case
The regulator said on July 21 that nine cryptocurrencies listed on Coinbase, the most popular platform in the United States, are unregistered securities.
The announcement came as the SEC and Justice Department filed charges against former Wahi and two others, accusing them of running an insider trading scheme that earned them more than $1.1 million.
Wahi allegedly tipped off his brother, Nikhil Wahi, and his friend, Sameer Ramani, about upcoming token listing announcements on the crypto exchange.
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“Prior to these announcements, which typically resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit,” the SEC said.
The nine tokens are: Flexa’s AMP, rally’s RLY, DerivaDEX’s DDX, XY Labs’ XYO, Rari Capital’s RGT, Liechtenstein Cryptoassets Exchange’s LCX, Powers POWR, DFX Finance’s DFX and Kromatika Finances’ KROM.
What is a security?
This decision, which surprised the industry, has important consequences because until now tokens, or coins, have not been considered securities.
This means that they escape strict authority supervision and are not subject to the same rules for financial transparency and publicity as shares in, for example, a company. The listing process is also less strict than for a security.
“Each of the nine companies invited people to invest with the promise that it would use future efforts to improve the value of their investment,” the SEC alleged.
The regulator wants to refer to a Supreme Court ruling, the Howey test, which sets out certain criteria for defining an asset as a security.
The SEC’s decision drew a stream of criticism from the industry, other regulators and lawmakers.
Coinbase filed a petition with the SEC, asking the agency to say how it would apply federal securities laws to crypto assets, according to a blog post.
“The SEC v. Wahi case is a striking example of ‘regulation by enforcement,'” Commodity Futures Trading Commissioner Caroline Pham said in a statement posted on Twitter.
The crypto industry accuses the SEC of being vague in its rules and demands clarity.
For five years, the SEC has regulated the crypto industry via enforcement actions, targeting startups that raised money through initial coin offerings.
For example, the regulator is in a showdown with Ripple, a blockchain payments firm based in San Francisco. In a lawsuit, the commission says that XRP, a token associated with Ripple, should be seen as a security. The company rejects the claim.
Another sign of the tensions: The SEC has said it does not consider bitcoin and ether, the top two cryptocurrencies by market capitalization, to be securities.
But the current SEC chairman, Gary Gensler, remains vague about ether. He told lawmakers last May that bitcoin is a “commodity token” but sidestepped questions about ether.
