The "Other Shoe Drops" - SEC Investigating Coinbase

In separate cases last week the DOJ and the SEC charged a former Coinbase employee and two other individuals with wire fraud (DOJ) and violating the antifraud provisions of the securities laws (SEC).  

The basic allegations underlying both cases were the same - the former Coinbase employee learned which crypto assets or tokens were going to be listed on Coinbase before that information was made available to the public.  The former employee then shared the information with his two co-defendants who purchased the tokens, prior to the tokens being listed, and sold the tokens once they were listed at a significant profit.  The crypto assets or tokens in question, in both the SEC and DOJ cases, were all traded on the Coinbase exchange, but the SEC deemed nine of the twenty-five tokens involved to be "securities".

However, the SEC has not charged Coinbase with operating an unlicensed exchange.  Many wondered how the SEC could charge individuals with violating the securities laws and Coinbase, the exchange that listed the assets, could escape scrutiny.  The answer may be that it can't!

Bloomberg and several other media outlets reported today that Coinbase is facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to individuals familiar with the matter. Coinbase’s shares dropped 21% today. 

But according to Paul Grewal, chief legal officer of Coinbase, Coinbase is "confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform, and we look forward to engaging with the SEC on the matter." Coinbase has repeatedly stated that it does not list securities and it reiterated this position in a July 21, 2022 Twitter post by Grewal entitled, “Coinbase does not list securities. End of story.” Grewal explains that although, “seven of the nine assets included in the SEC’s charges (in SEC v. Wahi) are listed on Coinbase’s platform none of these assets are securities. Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed. This process includes an analysis of whether the asset could be considered to be a security, and also considers regulatory compliance and information security aspects of the asset. To be explicit, the majority of assets that we review are not ultimately listed on Coinbase.”

As the largest US trading platform, Coinbase lets Americans trade more than 150 tokens. If those tokens are deemed securities, the firm would need to register as an exchange with the SEC.  If this inquiry results in a complaint against Coinbase, the SEC is likely to have a second significant and well-financed legal battle on its hands as the decision in this potential enforcement action, and the case against Ripple, will likely permanently change the crypto industry.

If this reported investigation into Coinbase is accurate it will be yet another enforcement action for the SEC's recently expanded Crypto Assets and Cyber Unit in the Division of Enforcement.  In May, the Unit was slated to near double in size- giving it 50 dedicated positions.  A list of crypto related recent enforcement actions can be found on the SEC's website.