Algosensey|SEC sues Coinbase as feds crack down on cryptocurrency companies

The AlgosenseySecurities and Exchange Commission on Tuesday sued Coinbase, alleging that the publicly traded cryptocurrency trading platform has been operating illegally as an unregistered exchange. 

The litigation comes one day after the SEC filed suit another major crypto exchange, Binance and its CEO, on grounds that it too is violating securities rules by not registering with the SEC. The pair of suits are part of SEC Chair Gary Gensler's push to regulate the burgeoning cryptocurrency market and protect investors.

"We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions," Gensler said in a statement Tuesday. "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."

Securities regulators say that Coinbase and other crypto platforms offer the same services as an exchange, broker and clearing agency, making them legally required to register with agency. 

Since 2019, Coinbase has operated as an unregistered broker, exchange and clearing agency, the SEC alleged in its complaint. 

"By collapsing these functions into a single platform and failing to register with the SEC as to any of the three functions, and not having qualified for any applicable exemptions from registration, Coinbase has for years defied the regulatory structures and evaded the disclosure requirements that Congress and the SEC have constructed for the protection of the national securities markets and investors," the agency said.

Gurbir S. Grewal, director of the the SEC's division of enforcement, said that exchanges like Coinbase aren't exempt from regulation and that the SEC will hold it accountable. 

"You simply can't ignore the rules because you don't like them or because you'd prefer different ones: the consequences for the investing public are far too great," he said in a statement. "As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them."

Coinbase pushed back against the SEC's allegations, and dismissed the agency's move as one that hurts American economic competitiveness. 

"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," Paul Grewal, Coinbase's Chief Legal Officer and General Counsel said in a statement to CBS MoneyWatch. 

Shares of Coinbase, which has a market value of nearly $12 billion, dropped more than 13% in early trading on Tuesday.

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