Following fraud charges against a former employee of Coinbase, the company pushed back against SEC claims that it offers unregistered securities.
An ex-Coinbase product manager and two other people were charged with wire fraud in connection with an alleged insider trading scheme involving cryptocurrencies on Thursday. It’s the first case of its kind.
Prosecutors in the United States accused the individuals of conspiring to profit from the listing of new tokens on the Coinbase platform before they were publicly announced.
In a separate complaint filed Thursday, the SEC said that nine of the 25 tokens allegedly traded in the scheme were securities.
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Coinbase’s chief legal officer, Paul Grewal, denied the claims Thursday in a blog post titled “Coinbase does not list securities. End of story.”
“Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform,” Grewal said in the blog post. “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.”
The question of whether some cryptocurrencies should be classified as securities has perplexed both regulators and crypto firms.
Ripple, a San Francisco-based blockchain company, is currently fighting an SEC lawsuit alleging that XRP, a cryptocurrency with which it is closely associated, should be treated as a security.
It all stems from a landmark Supreme Court decision known as the Howey Test, which defines an asset as a security if it meets certain criteria. Security, as defined by the SEC, is “an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The SEC’s stance is significant because it implies that Coinbase may be required to classify some of the cryptocurrencies it offers as regulated financial instruments.
The process of listing securities, such as company shares, entails stringent disclosure and registration requirements. Cryptocurrencies, on the other hand, are unregulated and thus do not face the same level of scrutiny.
Coinbase’s token listing framework is known to be more conservative than that of other exchanges. According to CoinGecko data, Binance and FTX both offer more than 300 coins, while Coinbase offers just over 200.
Nonetheless, the SEC believes Coinbase hosts unregulated securities on its platform, which Coinbase denies.
The Commodity Futures Trading Commission’s Caroline Pham weighed in on the case on Thursday, calling the SEC securities fraud charges a “striking example of’regulation by enforcement.'” The CFTC regulates foreign currency trading.
“The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together,” Pham said in a statement. “Regulatory clarity comes from being out in the open, not in the dark.”
Coinbase’s Grewal concurred with Pham’s assessment.
“Instead of crafting tailored rules in an inclusive and transparent way, the SEC is relying on these types of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities,” he said in the blog post.