SEC takes aim at Coinbase: Is the end near for the top exchange?

In a recent development, the Securities and Exchange Commission (SEC) has issued a “Wells notice” to Coinbase, one of the world’s largest cryptocurrency exchanges and the leading exchange in the United States.

The notice was issued after the SEC conducted a cursory investigation into an unspecified portion of the platform’s listed digital assets, staking service, Coinbase Earn, Coinbase Prime, and Coinbase Wallet.

A Wells notice is a way for the SEC staff to inform a company that they are recommending enforcement action for potential violations of securities laws. While it is not a formal charge or lawsuit, it can lead to one.

Coinbase responded to the news by stating that it is prepared for this disappointing development and is confident in the legality of its assets and services.

The exchange also welcomed a legal process to provide the clarity it has been advocating for and to demonstrate that the SEC has not been fair or reasonable when it comes to its engagement on digital assets.

Coinbase assures its customers that its products and services continue to operate as usual and that today’s news does not require any changes to its current offerings.

Coinbase says it has little information to respond to

The Wells notice issued to Coinbase did not provide much information for the company to respond to. The SEC staff told the company that they have identified potential violations of securities law, but provided little else.

Coinbase had specifically requested that the SEC identify which assets on its platforms they believe may be securities, but the SEC declined to do so.

Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to.

The exchange says it met with the SEC more than 30 times over nine months, but they were doing all of the talking. In December 2022, the exchange asked the SEC again for feedback on its proposals.

The SEC staff agreed to provide feedback in January 2023. In January, the day before their scheduled meeting, the SEC canceled and told Coinbase they would be shifting back to an enforcement investigation.

Regulatory uncertainty in the crypto industry continues

Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only.

Coinbase says it has continued to try and engage with the SEC. In addition to its attempts to develop a registration path, it has repeatedly and formally asked the SEC to engage in rulemaking for the industry.

Coinbase filed a petition for rulemaking last summer and on Monday, it submitted another substantive comment letter in support of the petition, detailing the need for clarity around the SEC’s views of staking services and the lack of notice to the industry about any SEC concerns.

However, just two days later, Coinbase received a Wells notice that includes its staking services. The U.S. crypto regulatory environment needs more guidance, not more enforcement. Even courts are questioning the SEC’s inconsistent positions and lack of guidance to the industry.

Federal Bankruptcy Judge Michael Wiles in the recent Voyager case shared his findings in a ruling against the SEC that makes clear that the SEC is on shaky ground when it comes to the Commission’s recent views of cryptocurrencies being a security.