Coinbase Global announced it received a Wells Notice from the Securities and Exchange Commission late Wednesday, a warning that the regulator intends to recommend enforcement action for potential securities violations. Coinbase stock clawed back some of its Thursday losses on Friday.
In its filing, Coinbase says it "believes" potential enforcement actions would relate to aspects of its spot market, Coinbase Earn staking service, Coinbase Prime and Coinbase Wallet. Potential civil actions may include seeking injunctive relief, disgorgement and civil penalties, according to the crypto exchange.
The Wells Notice is not a formal charge or lawsuit, but can lead to one. The exchange's products and services will continue to operate as usual, Coinbase wrote in its blog.
Dead End Discussions
Coinbase claims it engaged in discussions with the SEC for how to register portions of their business with the regulator following an investigation last summer. "Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like - because there is no existing way for a crypto exchange to register," Paul Grewal, chief legal officer wrote in the blog.
Coinbase says it proposed two different registration models but failed to receive any feedback from the regulator.
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"We also reiterated that we stand by our listing process - we don't list securities today - and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none," according to Grewal.
The exchange says it met with the SEC more than 30 times over a nine month period. In January, Coinbase and the SEC were scheduled to meet for proposal feedback. But the meeting was canceled a day prior and the SEC shifted back to an enforcement investigation, Coinbase claims.
"After years of asking for reasonable crypto rules, we're disappointed that the SEC is considering courts over constructive dialogue," Grewal tweeted Wednesday. "But if courts are required, so be it. We'll defend the rule of law."
Coinbase Stock Tumbles
In a separate Twitter thread, CEO Brian Armstrong said the SEC reviewed its business in detail and approved it to go public two years ago. "Our S1 clearly explained our asset listing process and included 57 references to staking," Armstrong tweeted. "Coinbase runs a rigorous asset review process and has rejected more than 90% of assets that have applied to be listed on the platform."
Coinbase says its staking services are not securities under legal standards including the Howey test, which assesses if a product is in investment contract. The company claims it presented its staking services to the SEC in 2019 and twice in 2020, but was met with silence.
Coinbase called for more clarity on crypto regulations. "Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering," the company wrote.
COIN shares rose 2% Friday after Coinbase stock crashed 14% to 66.3 Thursday following the news. Shares had catapulted 97% year-to-date as of Thursday's close. But rattled by crypto panics, Coinbase stock remains well below its all-time-high of 368.90 from Nov. 9, 2021.
SEC Enforcement Action
Regulators cracked down on crypto so far this year, ramping up action against perceived bad actors after missing warning signs from the FTX collapse from November. On Wednesday, the SEC charged crypto entrepreneur Justin Sun and his companies for selling unregistered crypto asset securities.
Sun is the founder of the Tron Foundation and its Tronix (TRX) token, the BitTorrent Foundation and its BitTorrent (BTT) token, and Rainberry. The SEC charged Sun and his companies with fraudulently manipulating the secondary market for TRX through wash trading. Wash trading involves simultaneously buying and selling a token to make the volume appear higher without changing ownership.
SEC Cracks Down On Celebrities
The SEC also charged a group of eight celebrities for illegally touting TRX and/or BTT without disclosing they were paid for promotions.
The celebrities include Lindsay Lohan, Jake Paul, Austin Mahone, DeAndre "Soulja Boy" Cortez Way, Michele "Kendra Lust" Mason, Miles "Lil Yachty" Parks McCollum, Shaffer "Ne-Yo" Smith, and Aliaune "Akon" Thiam.
The SEC alleges Sun directed his companies to engage in more than 600,000 TRX wash trades from April 2018 to February 2019. Accounts under Sun's control wash traded between 4.5 million and 7.4 million TRX daily, the SEC says. His companies also directed celebrities to promote the tokens and recruit members to Tron-affiliated Discord and Telegram channels. There, they had investors create BitTorrent accounts for unregistered TRX and BTT distributions. In total, Sun generated $31 million from illegal TRX secondary market sales.
In February, the SEC fined crypto exchange Kraken $30 million for its staking-as-a-service program.
On March 8, major lender to crypto firms Silvergate Capital announced plans to shut down and liquidate its Silvergate Bank based on "industry and regulatory developments." On March 12, the FDIC took control of Signature Bank and sold substantially all of its assets and deposits to New York Community Bancorp subsidiary Flagstar Bank. The deal did not include Signature Bank's $4 billion in crypto deposits.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
