Coinbase warned by SEC about potential securities charges

In this photo illustration, the Coinbase logo appears on a smartphone screen.

Rafael Henrique | SOPA Images | Lightrocket | Getty Images

The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of US securities law.

Coinbase stock fell about 10% in extended trading on Wednesday.

“Based on discussions with staff, the company believes these potential enforcement actions will be related to aspects of the company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement and civil penalties.”

The SEC has stepped up its enforcement of the crypto industry, cracking down on companies and projects that the regulator claims traded unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022.

Months before the collapse of FTX in November, crypto markets were weakened by rising interest rates and a broad exodus from risk, which contributed to the collapse of stablecoin Terra and the demise of crypto hedge fund Three Arrows Capital and exchanges Celsius and Voyager.

A Wells notice is usually one of the last steps before the SEC formally issues charges. It generally sets the framework for the regulatory argument and gives the potential defendant an opportunity to rebut the SEC’s allegations.

Coinbase described the investigation as “perfunctory,” and said the Wells alert provided relatively little information about potential breaches.

“While we don’t take this development lightly, we are very confident in the way we operate our business — the same business we presented to the SEC for us to become a public company in 2021,” Coinbase Chief Legal Officer Paul Grewal said in a blog post.

The company said that until any legal proceedings are resolved, the exchange’s offering will continue to operate as usual.

Coinbase executives, including founder and CEO Brian Armstrong, have pushed back against perceived overreaction from the SEC, which has moved aggressively against the crypto industry since the collapse of FTX. At the direction of SEC Chairman Gary Gensler, the regulator has issued enforcement actions against several heavyweights, including Gemini, Genesis, TRON CEO Justin Sun, Do Kwon and crypto exchange Kraken.

“We are prepared for this disappointing outcome and confident in the legality of our assets and services,” Grewal said in a statement. “If necessary, we welcome a legal process to provide the clarity we have advocated and to demonstrate that the SEC has simply not been fair or reasonable in its involvement in digital assets.”

The SEC sent a Wells notice to stablecoin issuer Paxos in February. “We will engage with the SEC staff on this matter and are prepared to take vigorous legal action if necessary,” a Paxos spokesperson told CNBC at the time.

Grewal said Coinbase is looking for more regulatory clarity.

“Tell us the rules and we’ll follow them,” he said. “Give us an actual registration path and we will register the parts of our business that need to be registered.”

SEE: Important to have regularity clarity in US crypto markets, says the blockchain data firm