SEC Files Charges Against Cryptocurrency Exchange Coinbase

By Jon Blistein

The Securities and Exchange Commission's crypto crackdown continued Tuesday, with the financial regulator bringing new charges against another major cryptocurrency exchange, Coinbase.

The new complaint alleges that, since at least 2019, Coinbase has served as a securities exchange, broker, and clearing agency but never registered as such with the SEC. In doing so, the SEC said in a statement that Coinbase has "deprived investors of significant protections," including SEC inspection, record keeping requirements, and other safeguards.

One of those safeguards has to do with the SEC's allegation that Coinbase has been functioning simultaneously as an exchange, broker, and clearing agency — three key functions "typically separated in traditional securities markets," according to the complaint. A main reason for that separation, the SEC noted, is to "protect investors and their assets from the conflicts of interest that can arise when these functions merge."

"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions," SEC Chair Gary Gensler said. "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."

Paul Grewal, Chief Legal Officer and General Counsel for Coinbase, responded to the charges: "The SEC's reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America's economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance. The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual."

The Coinbase charges notably dropped just one day after the SEC filed 13 charges against Binance, the world's largest cryptocurrency exchange, and its founder/CEO Changpeng "CZ" Zhao. The SEC accused Binance of misleading customers and misusing funds, as well as allowing some top traders in the U.S. to keep using Binance's unregulated international exchange.

As Rolling Stone recently reported, Zhou is arguably the dominant player in crypto and among the 60 richest people in the world. Despite his stature, he's largely been able to keep a low profile — but that's changed in recent months, especially after the high-profile collapse of Binance's former main rival, FTX, and the indictment of its co-founder Sam Bankman-Fried (who's pleaded not guilty to numerous fraud and campaign finance charges).

Maryland Sen. Chris Van Hollen told Rolling Stone, "Clearly CZ has been lurking in the shadows. It's hard to put a finger on where [Binance is] operating, what they’re doing." He added: "We just went through the [Silicon Valley Bank] collapse, and that was a regulated bank, at least there was some review process. In [Binance's] case, we know nothing. This is a black box. So I worry about the potential for it to go down. A lot of people could lose a lot of money."