SEC Probing Coinbase Over Alleged Securities Listing

ByEdward Thompson

Jul 25, 2022

Coinbase’s troubles do not seem to be coming to an end, as the popular crypto exchange is now facing a probe from the Securities and Exchange Commission (SEC). Reports indicate that this is meant to determine if the exchange allowed its clients to trade unregistered securities on its platform.

Insider trading scheme

Last week, the SEC had launched a lawsuit about a crypto insider trading scheme against a former manager of the Coinbase crypto exchange and two other people. The former employee was accused of violating the insider trading rules of the company, as he tipped off his friend and brother about upcoming token listings.

Even though the SEC did not make any mention of Coinbase’s involvement at that time, the securities regulator alleged that out of the 25 tokens that the individuals had traded as part of their scheme, nine of them that Coinbase was offering were unregistered securities. Out of these nine tokens that the SEC mentioned, seven of them are still listed on the exchange.

Security and commodity debate

The SEC makes use of what it calls the Howey Test for determining if a digital asset fits the criteria of a security. This refers to a set of standards that have to be met by an investment for it to be considered a security and regulated accordingly. A security would automatically fall under the purview of the SEC, while a commodity would be under the oversight of the Commodity Futures Trading Commission (CFTC).

If a token involves people investing in an enterprise with the intention of making returns from the organization’s efforts, then it is categorized as a security. The SEC had previously mentioned that it does not consider Bitcoin, or Ethereum as a security.

But, it has weighed in on some other tokens, such as XRP that was developed by Ripple Labs, and it has been deemed a security by the regulator. Therefore, the SEC slapped the company with a lawsuit on December 2020 for selling unregistered securities. Last year, Gary Gensler, the chairman of the SEC, had also argued that Coinbase was listing dozens of tokens that could be securities and it could be breaking the law in this way.

Coinbase responds

Paul Grewal, the chief legal officer of the Coinbase crypto exchange, responded to the Bloomberg report about the SEC probe. He denied listing of unregistered securities on the Coinbase platform. He said that the exchange has a due diligence process it uses before listing any tokens, one that the SEC has previously reviewed and approved.

Last week, the San Francisco-based company had said that their process involves an analysis of the token to see if it can be regarded as a security and also the information security and compliance aspects of the asset. Before that, the crypto exchange had said that a petition had been filed with the SEC in exchange for improving the rules regarding digital asset securities. It called on the agency to develop a proper regulatory framework with formal procedures.

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