Cryptocurrency exchange Coinbase is reportedly facing an investigation from the US Securities and Exchange Commission (SEC) over whether it allowed users to trade unregistered securities, according to a report from Bloomberg. The SEC’s probe hasn’t yet been made public.
Sources close to the situation told Bloomberg that the SEC started taking a closer look at Coinbase’s practices after the exchange added over 100 additional tokens to its platform, including Dogecoin, the joke cryptocurrency based on the Shiba Inu meme. These types of coins typically do well after they’re first listed, but they’re very volatile, and their value typically evaporates over time.
This investigation is separate from the SEC’s case against former Coinbase product manager Ishan Wahi, his brother, Nikhil Wahi, and his friend, Sameer Ramani. The agency charged the three with insider trading earlier this month, alleging Ishan “repeatedly tipped the timing and content of upcoming listing announcements” to his brother and friend, which resulted in gains of over $1.1 million. It also claims that Nikhil Wahi and Ramani purchased “at least 25 crypto assets, at least nine of which were securities.”
Paul Grewal, the chief legal officer at Coinbase, disputes the SEC’s claims about Coinbase listing securities in a post on Medium, citing that the Department of Justice didn’t file security fraud charges against Coinbase when indicting Nikhil Wahi, Ishan Wahi, and Sameer Ramani for insider trading. Grewal states that “none” of the assets referred to in the SEC’s charges are considered securities.
“Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed,” Grewal writes. “This process includes an analysis of whether the asset could be considered to be a security, and also considers regulatory compliance and information security aspects of the asset.”
In general, a security is a tradable financial asset that holds monetary value and must be registered with the SEC. The tricky part about crypto, however, is that not all digital assets are considered securities. In 2018, former SEC chairman Jay Clayton told CNBC that cryptocurrencies that replace “sovereign currencies,” like Bitcoin and Ether, aren’t securities — but digital assets and tokens used in initial coin offerings (ICOs) are.
If this sounds confusing, that’s because it is. Last week, Coinbase petitioned the SEC (pdf) to clarify what exactly it considers a security, claiming the US lacks “a clear and workable regulatory regime.” Coinbase argues that the SEC takes an “enforcement-first” approach, rather than establishing a set of rules for companies to abide by.
“We are confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform, and we look forward to engaging with the SEC on the matter,” Grewal writes on Twitter.