COIN stock dove Tuesday after Securities and Exchange Commission widened its crackdown vs. top cryptocurrency exchanges to include a lawsuit against Coinbase. The filing follows the 13 charges the SEC levied on Monday against Binance and co-founder Zhao for alleged rules violations. Meanwhile, Binance and Zhao turned to play defense.
Coinbase Sued By SEC
The SEC complaint charges that Coinbase operated as an unregistered securities exchange, broker and clearing agency since at least 2019. The regulator also claims Coinbase never registered its staking-as-a-service program as required by law.
The staking-as-a-service-program allows customers to earn profits by pooling crypto assets to perform blockchain transaction validation services.
"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions," said SEC Chair Gary Gensler. "In other parts of our securities markets, these functions are separate. Coinbase's alleged failures deprive investors of critical protections, including rule books that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC."
The complaint included a list of several cryptocurrencies that the SEC said are "being offered and sold as investment contracts, and thus as securities."
The list of cryptos include Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infinity (AXS), Flow (FLOW), Chiliz (CHZ), Internet Computer (ICP), NEAR (NEAR), Voyager (VGX), Dash (DASH) and Nexo (NEXO).
The complaint was filed in the Southern District of New York.
The SEC sent Coinbase a Wells Notice in late March, a warning that the regulator intended to recommend enforcement action. Coinbase responded with their own lawsuit in April, requesting clarity on if it would allow the industry to be regulated using existing frameworks.
In mid-April, CEO Brian Armstrong floated the possibility of moving Coinbase overseas if regulators fail to establish a clear regulatory framework.
Coinbase Response
"Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America," Armstrong wrote in a Twitter post following the complaint. "So if we need to avail ourselves of the courts to get clarity, so be it."
Armstrong noted that the SEC reviewed Coinbase's business in 2021 and allowed it to go public. He also wrote that the SEC and CFTC have made conflicting statements and have yet to agree on what is a security and what is a commodity.
"There is no path to 'come and register' - we tried, repeatedly - so we don't list securities," Armstrong wrote. The exec also pointed out that the Coinbase lawsuit focuses exclusively on what is or is not a security and is "very different from others out there."
Show Cause Order
Following the SEC lawsuit Monday, the Alabama Securities Commission filed a Show Cause order against Coinbase and parent corporation Coinbase Global. The order alleges Coinbase violated securities law by offering its staking rewards program without registering with regulators. The ASC gave Coinbase 28 days to explain why they should not be forced to cease and desist from selling unregistered securities in Alabama.
"The ASC action does not prohibit Coinbase from offering staking as a service, so long as it complies with Alabama's laws," the regulator wrote in the release. The action was a result of a multi-state task force of 10 securities regulators including Alabama, California Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin.
Binance On The Defense
"We are disappointed that the U.S. Securities and Exchange Commission chose to file a complaint today against Binance," the company wrote in a release. "From the start, we have actively cooperated with the SEC's investigations … . Most recently, we have engaged in extensive good-faith discussions to reach a negotiated settlement to resolve their investigations. But despite our best efforts, with its complaint today the SEC abandoned that process and instead chose to act unilaterally and litigate."
The SEC claims Binance operated illegally in the United States through its affiliate, BinanceUS, despite publicly stating that it was a separate, independent trading platform for American investors. The lawsuit alleges that Zhao and Binance secretly controlled the platform's operations behind the scenes. The SEC also asserted that Zhao used other entities he controls to transfer and commingle funds to artificially inflate the platform's trading volume.
Binance did not directly deny those claims and instead focused on allegations of selling unregistered securities. Regulators have yet to lay out a clear framework for determining if certain cryptocurrencies are securities and levied similar charges against other exchanges including Coinbase.
Binance called the action, "another in a line of examples where … the Commission has determined to regulate with the blunt weapons of enforcement and litigation." The exchange said the SEC's strategy of regulation by enforcement undermines America's role as a global fintech hub.
However, Binance did not address accusations of commingling funds. "Any allegations that user assets on the Binance.US platform have ever been at risk are simply wrong," Binance wrote. "All user assets on Binance and Binance affiliate platforms, including Binance.US, are safe and secure."
Meanwhile, Binance saw nearly $780 million in net outflows over the past 24 hours following the lawsuit, according to figures from data firm Nansen.
Bitcoin, Coinbase Price Action
Bitcoin rallied back above $27,100 late Tuesday after diving below $25,400 following the SEC notice to Coinbase. The world's largest cryptocurrency pulled back sharply Monday after news of the Binance lawsuit. The currency hovered near the $27,000 level over the weekend.
Ethereum surged to $1,891 after dropping around $1,800 Monday.
Other cryptocurrency prices reversed to claw back yesterday's losses.
Coinbase stock dove 12% Tuesday after unraveling 18% premarket. COIN shares carved 9% lower during trading Monday on the Binance news.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
