The SEC is investigating major cryptocurrency trading firm Coinbase for permitting the trade of unregistered securities, sources told Bloomberg News Monday. The firm has faced increased scrutiny by the agency since expanding the amount of tokens it permits to trade, sources say. The inquiry has not been announced publicly.
The SEC publicly announced that it was charging a former Coinbase manager with insider trading last week. In a 62-page complaint, the agency also listed nine tokens as securities under the Howey Test, sending shockwaves through the industry. If cryptocurrency tokens are securities, they fall under SEC enforcement — and trading platforms like Coinbase would be outside the bounds of the law.
SEC Chair Gary Gensler has long suggested most cryptocurrencies are securities, though he’s never set a definitive rule. Bitcoin, he has said, might be a commodity.
The SEC’s probe into Coinbase predates the insider trading charges, insiders told Bloomberg, but the investigation was not known. Coinbase shares dropped as low as 9.2% on the news, which at worst threatens the company’s core business.
“We are confident that our rigorous diligence process — a process the SEC has already reviewed — keeps securities off our platform,” Chief Legal Officer Paul Grewal tweeted Monday evening. In response to a request for additional comment, Coinbase directed Protocol toward that tweet.
The SEC and DOJ’s charges of insider trading were criticized by many in crypto — and by CFTC Commissioner Caroline Pham — as “regulation by enforcement.” The argument is that the industry cannot comply with the law if they do not know what those laws are, and that prosecuting entities to clarify legal gray areas will slow innovation. Others point out that prosecution is precisely what law enforcement is designed to do.
Coinbase filed a petition with the SEC shortly after the insider trading charges were announced requesting that the agency propose clear rules governing the trading of “digitally native” securities, as well as clear guidance as to which digital assets should be regulated as securities at all.
Given today’s news, it looks like the agency has other plans.
Correction: This story has been updated to correct the date of Paul Grewal's tweet. This story was updated July 26, 2022.