This week has been big for crypto. Following the lawsuit against Binance.us on Monday, the SEC filed a lawsuit against Coinbase yesterday. Compared to the Binance.us lawsuit, the Coinbase lawsuit is relatively mild. Coinbase the company is sued but unlike CZ, Coinbase executives are not listed in the lawsuit. The gist of the lawsuit is that Coinbase is operating as an unregistered securities exchange and many tokens traded on the platforms such as SOL and MATIC are considered securities by SEC. In a press release, SEC said:
Coinbase allegedly:
Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.
As alleged in the SEC’s complaint, Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.
…
We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions. In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections
You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great. As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.
WOW! Basically the SEC is saying that the rules are clear and some of the tokens trading on Coinbase are clearly unregistered securities but Coinbase wants a different set of rules, which is not happening. Coinbase’s counter argument is that the tokens traded on Coinbase are not securities and since SEC let Coinbase IPO in 2021, Coinbase considered that a tacit approval of their business operations. Well, from my perspective as a customer, I don’t really see the difference between a token like SOL and a meme stock like GME. GME had to go through a lengthy process to IPO while SOL can just be listed and traded on Coinbase. That seems a bit unfair.
On the other hand, the main point of crypto is decentralization, transparency and anti-censorship. It doesn’t quite make sense for a decentralized token like SOL or MATIC to be listed in a centralized crypto exchange, which is opaque and subject to local regulations. The whole premise of centralized crypto exchange seems flawed so I don’t really know what good arguments Coinbase and other centralized exchanges really have. The only value I see for Coinbase is to be a crypto-fiat ramp with proper KYC/AML. But that’s not what they want. They want to be a centralized exchange who could list any tokens they want without full compliance of securities laws. Good luck with that!