Coinbase Slams SEC Over Insider Trading Issue

Coinbase signs in Times Square in New York during the company’s initial public offering on the Nasdaq on April 14, 2021.

Robert Nickelsberg | Getty Images

Coinbase has retracted claims from the Securities and Exchange Commission that it offers unregistered securities, following accusations of fraud against a former employee of the company.

A former Coinbase product manager was charged Thursday, along with two other people, with wire fraud in connection with an insider trading scheme involving cryptocurrency. The case is the first of its kind.

US prosecutors have accused the individuals of conspiring to profit from the listing of the new tokens on Coinbase before it was publicly announced.

In a separate complaint filed Thursday, the SEC said that nine of the 25 tokens allegedly circulating in the scheme were securities.

Coinbase’s chief legal officer, Paul Grewal, denied the allegations Thursday in a blog post titled “Coinbase Doesn’t List Securities. End of Story.”

“Seven of the nine SEC fee-listed assets are listed on the Coinbase platform,” Grewal said in the blog post. “None of these assets are considered securities.”

“Coinbase has a rigorous process for analyzing and reviewing every digital asset before it is made available on the exchange — a process that has been reviewed by the SEC itself.”

Whether some cryptocurrencies should be considered securities is a controversial issue that has confused regulators and crypto companies alike.

Ripple, a San Francisco-based blockchain company, is currently fighting a lawsuit from the Securities and Exchange Commission that claims that XRP, a cryptocurrency to which it is closely related, should be treated as collateral.

It goes back to a landmark Supreme Court case known as the Howey Test, which considers an asset as a security if it meets certain criteria. According to the Securities and Exchange Commission, a security is defined as “an investment of money, in a joint venture, with a reasonable expectation of profit derived from the efforts of others.”

The SEC is important because it means that Coinbase may have to classify some of the cryptocurrencies they offer as regulated financial instruments.

The process of listing securities, such as shares in a company, includes strict disclosure and registration requirements. By contrast, cryptocurrencies are not regulated and therefore do not come with the same level of scrutiny.

Coinbase is known to be more conservative with its token list framework than some other exchanges. Binance and FTX offer over 300 coins, for example, while Coinbase lists just over 200, according to CoinGecko data.

However, the Securities and Exchange Commission believes the company is hosting unregulated securities on its platform, an allegation Coinbase denies.

CFTC commissioner Carolyn Pham also looked into the case Thursday, calling the SEC’s securities fraud charges “a striking example of ‘regulation through enforcement’.” The CFTC oversees foreign exchange trading.

“The SEC’s allegations may have broad implications beyond this individual case, underscoring the importance and urgency of regulators working together,” Pham said in a statement. “Regulatory clarity comes from being out in the open, not in the dark.”

Coinbase’s Grewal agreed with Pham’s assessment.

“Instead of crafting ad hoc rules in a comprehensive and transparent manner, the SEC is relying on these kinds of one-time enforcement actions to try and place all digital assets within its jurisdiction, even those that are not securities,” he said.

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