It's a nightmarish day for Coinbase.
The most famous platform for buying and selling cryptocurrencies in the United States woke up on June 6 with a complaint filed by the U.S. Securities and Exchange Commission (SEC) against it.
The SEC alleges that Coinbase (COIN) was operating illegally because since 2019 it has been "an unregistered national securities exchange, broker, and clearing agency."
The Wall Street regulator also charged Coinbase "for failing to register the offer and sale of its crypto asset staking-as-a-service program," according to a statement.
"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chairman Gary Gensler.
"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."
What Is a Security?
The feud between the SEC and Coinbase revolves around two points: Is a cryptocurrency a security? And what about the staking service? For the SEC they are securities.
A security is, according to the agency, "an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The SEC references a Supreme Court judgment of 1946, the Howey Test, that sets what an "investment contract" is and therefore would be subject to U.S. securities laws. An investment contract exists if money is invested with expectations of profits.
Seen in this light, any coin except bitcoin is a security, according to the SEC.
In addition to coins, the SEC is also targeting staking, which is is a way in which investors lock up – or stake – their crypto tokens with a blockchain validator. The goal is to be rewarded with new coins when their staked crypto tokens become part of the process for validating data on the blockchain.
For billionaires Jack Dorsey and Elon Musk, the SEC offensive means Coinbase can now focus on bitcoin and Dogecoin, their favorite cryptocurrencies. This is what they said in a thread on Twitter started by Pierre Rochard, VP of Research at Riot Platforms. It's important to note that Rochard is a bitcoin evangelist.
Bitcoin And Dogecoin
"Coinbase should pivot back to being focused on #Bitcoin," Rochard posted on June 6, while resurrecting a tweet of Coinbase's CEO Brian Armstrong from 2015.
"Ripple, Stellar, and Altcoins are all a distraction. Bitcoin is way too far ahead. We should be focused on bitcoin and sidechains," Armstrong said on Feb.23, 2015.
Dorsey, a bitcoin evangelist agrees, in light of the current regulatory and legal environment.
"💯," the billionaire agreed.
Musk added that Coinbase should in addition to bitcoin, focus on Dogecoin, the meme coin of which the billionaire is the biggest influencer.
"Doge ftw," the tech mogul commented on Dorsey's tweet.
Bitcoin (BTC) is the leading cryptocurrency by market value. Its market value is currently nearly $507 billion, which is 44% of the $1.15 trillion cryptocurrency market, according to data firm CoinGecko. Dogecoin (DOGE) is the No. 9 cryptocurrency by market value at $9.6 billion.
Dorsey even went so far as to rule out Ether (ETH), the No. 2 cryptocurrency by market value --$222.1 billion -- and native token of the Ethereum blockchain, which allows the development of decentralized finance or DeFi applications.
"Is ETH a security jack?" the co-founder of Twitter was asked by a Twitter user.
"Yes," Dorsey responded.
Basically, Coinbase would get into trouble by continuing to offer Ether since the SEC considers only bitcoin not to be a security.
