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Shares in Coinbase fell 13 per cent on Thursday after the US markets regulator warned it was considering potential enforcement action against the crypto exchange over possible securities laws violations.
The Nasdaq-listed group confirmed late on Wednesday it had received a “Wells Notice” from the Securities and Exchange Commission, which warns companies they may face legal action. The SEC is looking at Coinbase’s crypto staking business, as well as investment and custody services, and part of its spot trading business, the company confirmed.
The Wells Notice is the latest in a growing line of actions the SEC has taken against prominent crypto companies in the US as the agency’s chair, Gary Gensler, takes a tougher stance on an industry he deems largely non-compliant with securities law.
Since the start of this year, the financial markets watchdog has fired off a blitz of enforcement actions, including suing lender Genesis and exchange Gemini for failing to register a crypto-lending scheme as a securities offering. On Wednesday, the agency sued crypto entrepreneur Justin Sun, whose companies include Tron and BitTorrent, as well as a host of celebrities the SEC alleged had improperly touted digital assets.
The Wells Notice, the second served to Coinbase by the SEC, has made a “preliminary determination” to recommend action against the exchange, according to a copy seen by the Financial Times.
A potential civil action may involve a request for an injunction, a cease-and-desist order or civil money penalties, among other measures.
Trevor Williams, an analyst at Jefferies, described the notice as an “ominous sign” that could put revenue from trading alternative coins and staking in jeopardy if they were required to register with the SEC as securities. “We estimate around 35 per cent of net revenue is potentially at risk, depending on the SEC’s course of action,” he said.
Another exchange, Kraken, last month agreed to pay a $30mn settlement and end its staking business, in which customers agree to lock up their tokens in other crypto projects, in return for a high yield.
In a blog post Coinbase’s chief legal officer Paul Grewal said the company was “prepared for this disappointing development”.
“We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so,” he said, adding that Coinbase was confident in the legality of its assets and services.
Coinbase chief executive Brian Armstrong said on Twitter that “after years of asking for reasonable crypto rules, we’re disappointed that the SEC is considering courts over constructive dialogue. But if courts are required, so be it.”
A person familiar with the matter said Coinbase has met the SEC roughly 60 times during the past nine months. According to the Wells Notice, the exchange has until April 5 to set forth any reasons why enforcement action should not be filed. The SEC declined to comment.
Earlier this year, Coinbase reached a $100mn settlement with New York regulators over alleged anti-money laundering failures. In 2021, the company dropped plans to launch a digital asset lending product after the SEC had warned it would constitute an unregistered security and that it would have sued the platform if the exchange followed through on the debut.
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