SEC Cracks Down on Crypto Exchanges

The big story in the investment world last week was the Securities and Exchange Commission initiating a long-anticipated showdown with the cryptocurrency sector. On June 5, the agency filed a lawsuit against the world’s largest crypto exchange, Binance. A day later, the SEC sued the largest crypto exchange based in the U.S., Coinbase.

Essentially, the SEC is claiming in both cases that the exchanges broke the law by not registering with the agency, an assertion that hinges on its view that crypto assets qualify as securities. Judging by past disclosures, Coinbase executives sensed this day would eventually come. The company openly acknowledged in its S-1 registration statement from 2021 that its platform was not registered or licensed with the SEC or other authorities as a broker-dealer, national securities exchange or alternative trading system. Furthermore, Coinbase explicitly stated that for the assets currently available on its platform, it did not seek to register or rely on any exemption from such registration or license.

“Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a ‘security’ under applicable laws,” the filing said. “In addition, we could be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in compliance with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration.”

Meanwhile, the SEC’s actions against Binance and Coinbase highlight what some observers say amounts to a redefinition of the concept of an exchange. In April, the commission reopened the comment period on proposed amendments to Rule 3b-16 of the Securities Exchange Act of 1934. In doing so, the SEC reiterated its view on the applicability of current rules to crypto-trading platforms and expanded on how the proposed amendments would apply to other trading systems not covered by existing law.

If enacted, the amendments would dramatically expand the universe of platforms required to register with the SEC as exchanges or broker-dealers. The likelihood for confusion in the marketplace seems high in the event the amendments are passed, given the complexities of the regulatory landscape as we now know it.

For its part, Coinbase isn’t shying away from the idea that the U.S. regulatory system needs better-defined rules of the road for the crypto sector. Paul Grewal, Coinbase’s chief legal officer, testified before the House Committee on Agricultural Services this month to extoll the virtues of the Digital Asset Market Structure Discussion Draft, a skeleton version of a bill laying out a regulatory framework for the crypto sector.

Take it as a sign that Coinbase may be savvier than the typical tech upstart. Rather than balking at being regulated at all, Coinbase is trying to steer the conversation towards its favored reforms.

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