Market Analysis

SEC Investigating Coinbase Over Alleged Securities: Bloomberg

sec-investigating-coinbase-over-alleged-securities:-bloomberg

Key Takeaways

  • The SEC is probing Coinbase to determine whether it let customers trade unregistered securities, Bloomberg has reported.
  • The update follows the SEC’s claim that Coinbase lists “at least nine” securities as part of an insider trading scandal involving a former employee.
  • Coinbase has denied that it lists securities and called for the SEC to reconsider how it determines whether an instrument is a security of not.

Coinbase urged the U.S. financial regulator to rethink how it classifies securities in response to last week’s court filing. 

Coinbase Reportedly Facing SEC Probe

The Securities and Exchange Commission has reportedly launched another attack on the cryptocurrency industry. 

The U.S. financial regulator has set in motion an investigation to ascertain whether Coinbase let its customers trade cryptocurrency tokens that should have been registered as securities, Bloomberg has reported citing three people familiar with the matter. 

It comes days after the SEC and Department of Justice jointly accused a former Coinbase employee and two of his associates of insider trading. The SEC said in the court filing that Coinbase listed “at least nine” crypto assets that could be classified as securities, echoing warnings the agency’s chair Gary Gensler has made on repeated occasions over the past year. 

According to the Bloomberg report, the SEC has been keeping a close eye on Coinbase since it started to offer a wider range of crypto tokens for trading. The sources asked for their anonymity to be preserved as the inquiry has not been announced publicly. 

The insider trading allegations have served as another blow to Coinbase, which has faced ongoing criticism from the industry over its dubious asset listing process. Prominent crypto personalities like Cobie have mocked Coinbase’s choice of supported assets in the past, while others have called for employees responsible for handling its listings to be sacked following the SEC’s updates. 

Exchange Denies It Lists Securities 

Coinbase has repeatedly defended its actions and last week published a new blog post denying that any assets listed on the exchange could be classified as securities. On July 21, the company’s Chief Legal Officer Paul Grewal penned a post titled “Coinbase does not list securities. End of story.” The firm published a separate blog post on the same day, urging the SEC to rethink how it considers whether an asset could qualify as a security. The post argued that current U.S. securities law is “not well-suited to govern digital assets” and included a link to a petition Coinbase had sent to the SEC asking them to establish new rules for the crypto securities market. 

The SEC currently makes a decision on whether an asset could be classified as a security based on the Howey Test, a ruling established by the U.S. Supreme Court in a 1946 case. The Howey Test refers to the 1933 Act and assesses whether market participants buy into an instrument (such as a crypto token) with the expectation of a profit based on the efforts of a third party. 

Under the SEC’s view, if an investor can buy a crypto token with the expectation of a profit based on the work of a central team, for example, that token could potentially be classified as a security based on the Howey Test.

U.S. regulators have been paying closer attention to the crypto space in recent months thanks to Terra’s blowup and a washout across the broader industry. Crypto is down from a market cap of over $3 trillion in November 2021 to just above $1 trillion today, sparking concern over whether retail investors are sufficiently protected. 

Coinbase’s stock took a hit in pre-market trading following the SEC probe revelations. COIN is down 5.3% at press time, extending the bleed it’s suffered in tandem with the rest of the market since launching in April 2021. At its current trading price of $67, it’s more than 80% short of its all-time high, meaning it’s slid even further from its peak than the embattled crypto mainstays Bitcoin and Ethereum.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies. 

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