Coinbase and the SEC Are Facing Off. What’s at Stake

Coinbase Global is at odds with the Securities and Exchange Commission on a topic that might have far-reaching implications for the crypto sector as a whole: Are certain tokens actually securities?

The SEC charged a former Coinbase (COIN) product manager and two others with insider trading on Thursday. The issue depends on a small but essential argument: the SEC claims that some cryptocurrencies listed on Coinbase are truly securities. Coinbase is not on board.

"Securities are not listed on Coinbase. That's the end of the tale," said Paul Grewal, the company's chief legal officer, in a statement.

The industry has been grappling with the question of whether tokens should be classed as currencies, commodities, or securities. Some tokens, according to the SEC, most likely fit the definition of security. According to the SEC, Ripple – a payments network coin — is security, though Ripple Labs and the regulator are involved in a court dispute over this distinction.

Bitcoin, on the other hand, is a commodity, according to SEC chief Gary Gensler. Meanwhile, Bitcoin futures are governed by the Commodity Futures Trading Commission (CFTC).

The definitions are critical because if crypto tokens are not securities, the SEC may not have any control over exchanges like Coinbase and would be unable to oversee token listing and trading.

In addition, the regulator may not have much of an insider trading case.

According to the SEC's complaint in the matter, a former Coinbase manager informed his brother and another individual that specific coins would be placed on the exchange, allowing them to profit from the sensitive knowledge. According to the SEC, the plan made more than $1.1 million in earnings. According to the SEC, at least nine of the tokens were securities.

"We are not concerned with labels, but rather with the economic reality of an offering," said Gurbir Grewal, director of the Securities and Exchange Commission's division of enforcement, in a statement. "Several of the crypto assets at issue were securities, and the defendants allegedly participated in conventional insider trading prior to their placement on Coinbase."

On Twitter, Coinbase CEO Brian Armstrong stated, "we aggressively monitor for illicit activity and investigate any claimed malfeasance." According to him, the business initiated an inquiry in April after receiving information concerning probable frontrunning, disclosing the identities of three persons to police enforcement, and firing an employee.

It is also evident that Coinbase seeks to contest the SEC's assumption that some tokens on its platform constitute securities.

"We completely disagree with the SEC's claim that any of the crypto assets we provide are securities," said Coinbase's chief legal officer, Paul Grewal, in a tweet on Thursday. "We continue to be satisfied that Coinbase's robust vetting process keeps securities off Coinbase's platform," he said in a blog post.

The SEC's insider-trading investigation appears to be causing friction with other authorities. The SEC's effort, according to CFTC Commissioner Caroline Pham, is an example of "regulation by enforcement." The SEC's claims "may have far-reaching consequences beyond this one instance," she noted in a statement, urging authorities to cooperate more closely.

Meanwhile, Coinbase is attempting to increase pressure on the SEC to develop crypto standards. On Thursday, the business submitted a petition seeking that the SEC "launch rulemaking on digital asset securities."

The SEC did not reply to a comment request. Whatever classification tokens finally receive, the sector is likely to face more regulatory scrutiny and enforcement activities. The Department of Justice is becoming increasingly active in prosecuting crypto criminality; in the Coinbase case, the DOJ brought criminal charges, and it also filed charges against a former employee of the NFT platform Opensea, claiming insider trading.

The SEC intends to strengthen its crypto enforcement, according to J.P. Morgan analysts led by Steven Alexopoulos in research released on Friday.

The SEC hired 20 employees to its crypto asset and cyber division in May, raising its total workforce to 20 — with the regulator requesting more resources to strengthen crypto regulation.