How the Coinbase-SEC Lawsuit Will Change Crypto for the US

This year alone, the SEC filed a complaint against Kraken, Gemini, Paxos, Binance.US, and Coinbase. These platforms comprise the bulk of centralized crypto activity in the United States, making the revelations in Operation Chokepoint 2.0 paper all the more prescient.

Moreover, the SEC Chair, Gary Gensler, made it clear in his public appearance at CNBC that there is no room for digital currencies when there is already a digital dollar. It is highly unusual for an official from a mid-tier regulatory branch to make such a proclamation that belongs in the arena of presidential candidates or lawmakers.

With the latest Coinbase lawsuit, the SEC has put the cards on the table, as the complaint specifically addresses digital assets as unregistered securities. Coinbase CEO Brian Armstrong announced that the company is bringing the SEC to court to “finally get some clarity around crypto rules.”

What are the allegations and implications of this upcoming legal battle?

What Does the SEC Claim Against Coinbase?

Noting that Coinbase is the largest US CEX that has serviced over 108 million customers, the SEC charged Coinbase for operating as an unregistered exchange, broker, and clearing agency on Tuesday. Since none of these activities have been properly registered, Coinbase made billions of dollars unlawfully since at least 2019.

In response, Brian Armstrong reminded that the SEC allowed Coinbase to go public in April 2021 following a thorough review. However, the 101-page SEC complaint preemptively noted that the approval doesn’t infer underlying business endorsement.

The SEC complaint further alleges that “Coinbase has for years defied the regulatory structures,” evading the proper disclosure requirements. This infers Coinbase’s role as an unregistered broker via Coinbase Prime and Coinbase Wallet services which route trading orders for crypto assets to the exchange or third-party platforms.

According to the SEC, this is a problem because those assets are securities, necessitating proper legal registration. Specifically, following the Supreme Court’s decision in SEC v. W.J.Howey Co., 328 U.S. 293 (1946), otherwise known as the Howey Test for securities.

In essence, the SEC claims that Coinbase expanded the availability of digital assets for trading, regardless if they are securities, to collect transaction fees to boost its revenue. By allowing this, Coinbase exposed investors to “significant risk,” which the SEC is mandated to protect against.

Lastly, the regulatory watchdog claims that Coinbase launched its staking program for XTZ (Tezos), ATOM (Cosmos), ETH (Ethereum), ADA (Cardano), and SOL (Solana) without ever filing a registration statement. The SEC goes into great length describing why each of these five assets passes the Howey Test.

But the securities umbrella also applies to effectively Coinbase’s tradable assets front page, without Bitcoin (BTC), Litecoin (LTC), and stablecoins (for now).

By inference, nearly all cryptocurrencies (altcoins) are unregistered securities. This validated Brian Armstrong’s claim when he noted that SEC’s lawsuit against Coinbase is “very different from others out there” because it is “exclusively focused on what is or is not a security.”

What Happens If the SEC Wins?

The ongoing SEC vs. Ripple Labs court battle has been long heralded as the precedent-making case on whether most digital assets are unregistered securities. The SEC operates in a legislative void, so it needs a ruling to affirm its interpretation of pre-computer securities law.

Brian Armstrong noted that the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) clash in their interpretations. For instance, CFTC inferred Ether (ETH) to be a commodity as the agency seeks regulatory jurisdiction over the SEC.

Moreover, the SEC’s interpretations of securities seem to shift from one lawsuit to another.

Therefore, the upcoming Coinbase vs. SEC battle will set the record straight. If the SEC wins, the legal precedent would effectively ban the use of cryptocurrencies. That’s because the enforcement actions would be too burdensome and costly to any but the largest and most established centralized players.

The DeFi space would then have to go into the gray underground market, creating an environment of lesser investor protection, not greater. After all, when China banned cryptocurrencies, it merely displaced the market.

More importantly, the SEC’s legal victory over Coinbase would send a strong signal to the crypto industry in the US, likely causing an exodus of FinTech innovators into UAE or Hong Kong. In the meantime, Coinbase (COIN) stock took a 14% dive over the week, hollowing otherwise solid year-to-date performance of 45%.

Do you think SEC Chair Gary Gensler is protecting investors by suing Coinbase, Binance.US, and other crypto players? Let us know in the comments below.