Coinbase warned by SEC of potential securities charges

Coinbase, the largest US crypto exchange, has received a notice from the Securities and Exchange Commission (SEC) informing the company of the regulator’s plans to take enforcement action against it. This latest development is part of a long-standing dispute between the SEC and Coinbase, and the news caused the company’s stock to drop as much as 14% in pre-market trading on Thursday.

SEC Chair Gary Gensler has repeatedly warned that many of the tokens and products offered by crypto companies are securities and that trading platforms must register with his agency. These warnings intensified after the collapse of several prominent companies last year, including FTX, which left investors with billions of dollars in losses. In a separate action, the SEC has sued crypto mogul Justin Sun for allegedly violating securities rules.

In a filing on Wednesday, Coinbase stated that the Wells notice it received concerned an undefined segment of its listed digital assets, as well as its staking service Coinbase Earn and Coinbase Wallet. A Wells notice is issued at the end of an investigation, and companies are given time to respond to the agency’s allegations. While not all notices lead to enforcement actions, they often result in either lawsuits or settlements and fines.

Following the news, Coinbase’s stock fell as low as $66.11 in pre-market trading and was down 11% at $68.89 at 8:36 a.m. London time. Despite the setback, Coinbase stated that its products and services would continue to operate as usual for the time being. The company’s chief legal officer, Paul Grewal, said in a statement that Coinbase was prepared for the disappointing outcome and confident in the legality of its assets and services. He also welcomed a legal process to provide clarity and demonstrate that the SEC had not been fair or reasonable in its engagement on digital assets.

The SEC’s uptick in enforcement actions this year has rattled the crypto industry. Coinbase’s rival Kraken has already settled with the SEC, while Paxos Trust Co. has received a Wells notice alleging that the Binance USD stablecoin it issues is an unregistered security. However, Coinbase has maintained that the tokens listed on its exchange are not securities and that it has a thorough vetting process. The company’s CEO, Brian Armstrong, has stated that he is willing to fight the SEC in court if necessary.

Kraken agreed to discontinue its program in the US without admitting or denying the SEC’s allegations. After the news of the Wells notice, Coinbase shares slumped 12% in post-market trading in New York. While the company’s stock has rebounded this year as Bitcoin climbed to more than $28,000, it is still down more than 70% from its peak in November 2021.