August 14, 2022

Coinbase blasts SEC over insider trading case

Coinbase signage in New York’s Times Square during the company’s initial public offering on the Nasdaq on April 14, 2021.

Robert Nickelsberg | Good pictures

Coinbase The Securities and Exchange Commission’s claims that the company was offering unregistered securities were pushed back following allegations of fraud against a former employee.

A former Coinbase product manager was charged Thursday with two other people with wire fraud in connection with an insider trading scheme involving cryptocurrencies. This case is the first case.

U.S. prosecutors alleged that individuals conspired to profit from Coinbase’s listing before new tokens were publicly announced on its platform.

In a separate complaint filed Thursday, the SEC said nine of the 25 tokens allegedly traded in the program were securities.

Coinbase’s chief legal officer, Paul Grewal, said on Thursday that a Blog “Coinbase not listing securities. End of story.”

“Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s site,” Grewal said in a blog post. “None of these assets are securities.”

“Coinbase has a rigorous process to analyze and review every digital asset before making it available on our exchange – which the SEC itself has reviewed.”

Whether certain cryptocurrencies should be considered securities is a contentious issue that has confused both regulators and crypto companies alike.

San Francisco-based blockchain company Ripple is currently fighting a lawsuit from the SEC that demands that XRP, and its closely related cryptocurrency, be treated as a security.

This leads to a landmark Supreme Court case known as the Howie Test, which deems an asset safe if it meets certain criteria. According to the SEC, a security is defined as “an investment of money in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”

The SEC’s position is significant because Coinbase may be forced to classify some of the cryptocurrencies it offers as regulated financial instruments.

The process of listing securities, such as shares of a company, involves strict disclosure and registration requirements. Cryptocurrencies, in contrast, are unregulated and therefore do not come with the same level of scrutiny.

Coinbase is known for being more conservative with its token listing structure than some other exchanges. Both Binance and FTX offer more than 300 coins, for example, while Coinbase lists more than 200, according to CoinGecko data.

Nevertheless, the SEC believes the company hosts unregulated securities on its platform, which Coinbase denies.

Carolyn Baum, commissioner of the Commodity Futures Trading Commission, weighed in on the case Thursday, calling the SEC securities fraud allegations “a prime example of ‘regulation by enforcement.’ The CFTC oversees foreign exchange trading.

“The SEC’s allegations could have far-reaching implications beyond this single case, underscoring how important and urgent it is for regulators to work together,” Baum said in a statement. “Regulatory clarity comes from the open, not the dark.”

Coinbase’s Grewal agreed with Pham’s assessment.

“Instead of crafting rules designed in an inclusive and transparent way, the SEC has relied on these kinds of single enforcement actions to bring all digital assets, non-securities, under its jurisdiction,” he said.