Coinbase Faces SEC Investigation Over Potential Security Concerns

Coinbase has received a "Wells notice" from the SEC, suggesting possible violations of securities laws, but remains confident in the legality of its assets and services.

Coinbase Faces SEC Investigation Over Potential Security Concerns

The Securities and Exchange Commission (SEC) has given Coinbase a “Wells notice” after a cursory investigation regarding an unspecified portion of their listed digital assets, Coinbase Earn, Coinbase Prime, and Coinbase Wallet, which suggests possible violations of securities laws. Coinbase has requested specific information about the assets and services in question but the SEC has declined to provide it. Coinbase remains confident in the legality of its assets and services, and if necessary, is willing to go to court to provide clarity on the matter. Although Coinbase has presented multiple proposals to the SEC about registration, the SEC has not responded to any of them.

Coinbase had been in discussions with the SEC about potentially registering some portion of their business with the commission. They developed and proposed two registration models, but the SEC did not provide any feedback. Despite meeting with the SEC more than 30 times over nine months, the SEC canceled a scheduled meeting in January 2023 and informed Coinbase that they would be shifting back to an enforcement investigation. The investigation is still at an early stage, and Coinbase has not been informed of any specific concerns about any assets on its platform. Nevertheless, the SEC issued a "Wells notice" to Coinbase, which is unusual given that their staking and exchange services have remained largely unchanged since 2021.

The US cryptocurrency exchange industry is experiencing regulatory uncertainty due to the SEC's focus on enforcement rather than developing a regulatory framework, according to Coinbase, a leading exchange. Coinbase has been seeking to engage with the SEC to create a registration path and has requested that the regulator engage in rulemaking for the industry. However, the SEC is issuing conflicting statements and taking enforcement actions against public companies like Coinbase, causing regulatory uncertainty in the industry. Coinbase has also criticized the lack of notice given to the industry about specific SEC concerns.

There are no securities listed on Coinbase, a popular cryptocurrency exchange, nor are there any products offered by Coinbase that are securities. It has a strict process to evaluate each digital asset before listing it on its exchange. This includes analyzing whether the asset can be considered a security and considering regulatory compliance and information security aspects. The company has rejected hundreds of assets that do not meet these standards. It has been eager to engage in registration discussions with the SEC to find a home for such assets.

The company has also explained that its staking services do not qualify as securities under any legal standard, including the Howey test. The company had presented its stake services to the SEC thrice before and received no concerns until the current investigation. Coinbase Wallet is a technology, not an exchange, broker, or centralized platform. This further highlights the need for comprehensive crypto regulation in the US that understands the technology.

The requests clear rules and a path for registering parts of its business that are required to be registered. The US cannot afford regulators to continue threatening good actors in the crypto industry for doing legal and compliant activities. This unfair approach will only drive innovation, jobs, and the entire industry overseas. The company is confident in the legality of its assets and services, and it welcomes a legal process to provide clarity and demonstrate the SEC's lack of fairness and reasonableness in its engagement with digital assets. In the meantime, Coinbase will continue building the most trusted products and services to update the financial system and create more economic freedom and opportunity worldwide.

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