Market fears crackdown amid ‘legal threats’ against Coinbase

Leading cryptocurrency exchange Coinbase has said it received “legal threats” after asking US regulators for clearer rules around cryptocurrency.

The Securities Exchange Commission issued a Wells notice to Coinbase on Wednesday, typically signaling that the SEC plans to take enforcement action for possible violations of securities laws.

“It is not a formal charge or lawsuit, but it could lead to one,” Coinbase noted in a blog post on Wednesday.

“Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.”

One of the Coinbase products under scrutiny is its staking business, which allows customers to earn rewards by setting aside part or all of their crypto balance for cryptocurrencies such as Ethereum (ETH) that run on a proof-of-stake blockchain.

As one of the few publicly traded crypto companies, Coinbase’s share price was quick to react to the news, falling more than 8 percent within hours.

The crypto market more generally was less volatile, but still fell. The price of cryptocurrencies including bitcoin fell slightly after the news.

Coinbase CEO Brian Armstrong said his company was confident of resolving the impending action, tweeting that Coinbase is “right on the law, confident in the facts, and welcomes the opportunity … (and by extension the broader crypto community) to come before a court”.

Crypto regulation has struggled to keep pace with the nascent industry, according to Coinbase, with the exchange previously criticizing the SEC over what it claimed was a vague regulatory structure.

SEC Chairman Gary Gensler has argued that cryptocurrency exchanges in the US such as Coinbase operate unregistered securities exchanges and should therefore take steps to register with the SEC or face legal action.

“While we don’t take this development lightly, we are very confident in the way we run our business — the same business we presented to the SEC to become a public company in 2021,” Coinbase’s blog post said.

“We continue to believe that regulations and legislation are better tools for defining the law for our industry than enforcement actions. However, if necessary, we welcome the opportunity for Coinbase and the broader crypto community to seek clarity in court.”