The SEC investigates Coinbase

Bloomberg revealed today that the SEC is investigating Coinbase. 

The SEC accuses Coinbase of listing securities

Bloomberg cites “three people familiar with the matter” who say the SEC is investigating whether Coinbase has listed digital assets on its exchange that should have been registered as securities.

In the US, as in other parts of the world, assets defined as “security” can be traded only after mandatory registration of the security with the SEC. 

Since it does not appear that any digital assets that can be exchanged on Coinbase are registered with the SEC as security, the agency is investigating whether any of the cryptocurrencies and tokens listed on Coinbase might fall under this definition. 

The first cryptocurrency that has been the subject of such attention from the SEC is XRP (formerly Ripple), resulting in a lawsuit filed by the agency against Ripple specifically because it was accused of putting a security on the market without prior registration. 

Coinbase long ago removed XRP from the tradable cryptocurrencies, but apparently the SEC has concerns about others as well. In addition, the exchange has been greatly expanding its offerings of tokens and cryptocurrencies for several months now, drawing particular attention from the SEC itself. 

Coinbase’s Chief Legal Officer, Paul Grewal, commented on the news, saying that they are confident that their rigorous due diligence process, already reviewed by the SEC, “will keep securities off our platform”. 

I’m happy to say it again and again: we are confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform, and we look forward to engaging with the SEC on the matter. A refresher: https://t.co/SaacvrZEiU

— paulgrewal.eth (@iampaulgrewal) July 26, 2022

The company posted on its official website an article titled “Coinbase does not list securities. End of story”. However, it is extremely unlikely that the SEC will be satisfied with one blog post to sweep away all doubts.

Coinbase breathes a sigh of relief for now

In part because, as Bloomberg reports, US politics seems to be pushing harder and harder for regulators to do more to oversee the cryptocurrency industry. Recently, the chairman of the SEC, Gary Gensler, also said that crypto trading platforms should do more to protect retail investors.

By now Coinbase has many dozens of cryptocurrencies and exchangeable tokens, and the likelihood that among all of them there are some that risk being considered a security seems to be there. However should their due diligence process for selecting assets to list be truly effective, then it is possible that among the listed cryptocurrencies there may not be any security. 

It is important to emphasize that these are only investigations for now, such that no real charges have yet been advanced. In other words, at this time, and until proven otherwise, Coinbase appears to be operating in line with US exchange regulations. 

What’s more, should the SEC deem some cryptocurrency listed by Coinbase to be a security, the problem would spread like wildfire to a great many other exchanges. 

Note that Coinbase’s stock price on the exchange is down 73% since the beginning of the year, but has recovered 18% in the last week. Yesterday, however, it fell 5.3% after these rumors spread.