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Coinbase sued by SEC, one day after Binance filing

In another blow to the crypto industry, the US Securities and Exchange Commission (SEC) has now sued Coinbase, its second lawsuit filed in two days against a major crypto exchange.

The SEC is accusing Coinbase, the second largest cryptocurrency platform in the US, of operating illegally because it failed to register as an exchange.

Monday, the SEC filed charges against Binance, the world's largest cryptocurrency exchange, and its founder Changpeng Zhao.

Both civil cases are part of SEC Chair Gary Gensler's push to assert jurisdiction over the crypto industry, which he on Tuesday again labeled a "Wild West" that has undermined investor trust in the US capital markets.

"The whole business model is built on a noncompliance with the US securities laws and we're asking them to come into compliance," Gensler told CNBC.

Crypto companies say the SEC rules are unclear, and that the agency is overreaching by trying to regulate them.

Paul Grewal, Coinbase's general counsel, in a statement said the company will continue operating as usual and has "demonstrated commitment to compliance."

Ten US states led by California also on Tuesday accused Coinbase of securities law violations concerning its staking rewards program.

Shares of Coinbase's parent Coinbase Global Inc were down $6.42, or 12.8%, at $52.29, after earlier falling as much as 20.9%.

Coinbase customers withdrew more than $57 million within a couple of hours of the SEC filing, the data firm Nansen said.

Thirteen crypto assets

In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

Founded in 2012, Coinbase recently served more than 108 million customers, and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion of net revenue last year.

In the staking rewards program, which has about 3.5 million customers, Coinbase pools crypto assets and uses them to support activity on the blockchain network, in exchange for "rewards" it provides customers after taking a commission for itself.

The states focused on this program also include Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase $5 million for selling unregistered securities.

Can’t ignore the rules

Tuesday's SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. The SEC had warned Coinbase in March that charges might be coming.

"You simply can't ignore the rules because you don't like them," SEC Enforcement Chief Gurbir Grewal said in a statement.

Gensler's crypto crackdown has prompted the industry to boost compliance, shelve products and expand outside the country.

Kristin Smith, CEO of the Blockchain Association trade group, rejected Gensler's efforts to oversee the industry.

"We're confident the courts will prove Chair Gensler wrong in due time," she said.

On Monday, the SEC accused Binance of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform, and misleading customers about its controls.

Investors pulled around $790 million from Binance and its US affiliate following Monday's news, data firm Nansen said on Tuesday morning.

Binance pledged to vigorously defend itself against the lawsuit, which it said reflected the SEC's "misguided and conscious refusal" to provide clarity to the crypto industry.

Coinbase's friction with Gensler dates to 2021, when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea.

Tuesday's case is SEC v Coinbase Inc et al, US District Court, Southern District of New York, No. 23-04738.

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