SEC Asks Coinbase to Halt Trading of Other Cryptocurrencies Prior to Lawsuit
In a move showcasing the US Securities and Exchange Commission’s (SEC) intention to assert regulatory authority over a wider portion of the market, Coinbase was asked to cease trading activities involving all cryptocurrencies except for bitcoin before the agency filed a lawsuit against the popular exchange.
Coinbase’s CEO, Brian Armstrong, revealed that the SEC made this recommendation before initiating legal action against the company for allegedly failing to register as a broker. The SEC’s case identified 13 lightly traded cryptocurrencies on Coinbase’s platform as securities, asserting that offering them to customers fell under its jurisdiction.
However, the SEC’s prior request for Coinbase to delist all more than 200 tokens it offers, with the exception of bitcoin, demonstrates the agency’s push for broader control over the crypto industry. Armstrong shared that the SEC insisted that “every asset other than bitcoin is a security,” without providing an explanation for their conclusion.
Had Coinbase complied with the request, it could have set a precedent that required the vast majority of American crypto businesses to either operate outside the law or register with the SEC. Armstrong stated, “Delisting every asset other than bitcoin, which, by the way, is not what the law says, would have essentially meant the end of the crypto industry in the US.”
The oversight of the crypto industry has been a gray area, with the SEC and the Commodity Futures Trading Commission (CFTC) competing for control. The CFTC filed a lawsuit against Binance, the largest crypto exchange, in March of this year, three months before the SEC took legal action against the same company.
SEC Chairman Gary Gensler has previously expressed his belief that most cryptocurrencies, except for bitcoin, are securities. The recommendation to Coinbase suggests that the SEC has adopted this interpretation as it seeks to regulate the industry.
Interestingly, the SEC’s case against Coinbase did not include Ether, the second-largest cryptocurrency and a fundamental component of many industry projects. Ether was also absent from the list of “crypto asset securities” specified in the SEC’s lawsuit against Binance.
The SEC stated that its enforcement division did not officially request “companies to delist crypto assets.” However, it clarified that during investigations, the staff may share their views on conduct that raises questions under securities laws.
The debate over whether all or any crypto tokens should fall under the SEC’s purview continues among US authorities. If the SEC were to assume oversight, the industry would face significantly stricter compliance standards. Crypto exchanges typically offer custody services and engage in borrowing and lending activities with clientele, practices that SEC-regulated companies cannot engage in.
As Charley Cooper, former CFTC chief of staff, explained, “There are a bunch of American companies who have built business models on the assumption that these crypto tokens aren’t securities. If they’re told otherwise, many of them will have to stop operations immediately.”
Peter Fox, a partner at law firm Scoolidge, Peters, Russotti & Fox, suggested that without intervention from Congress, it would be challenging to envision public offerings or retail trading of tokens.
The SEC declined to comment on the wider implications for the industry if Coinbase were to settle by delisting every token other than bitcoin.