On Tuesday, there was a more than 15% drop in the shares of Coinbase, after reports said that the crypto exchange was facing an investigation from the SEC about its platform offering people unregistered securities. The share price of Coinbase has come down 77% this year.
The SEC probe
According to a source, the US Securities and Exchange Commission (SEC) is probing into the exchange in order to determine if it allowed its users to trade digital assets illegitimately, which have not been registered as securities.
Paul Grewal, the chief legal officer at Coinbase, said that he had already stated this before, but was willing to reiterate that the SEC has already reviewed the exchange’s due diligence process. He said that the process is designed to keep securities off their platform and added that they were looking forward to discussing the matter with the securities regulator.
Reports indicate that the investigation of the SEC had happened before the authority filed an insider trading case against a former manager of Coinbase. This alleged scheme saw charges filed against an ex-manager of Coinbase, along with two other people. However, the same day, the SEC had also filed a complaint about Coinbase in which it said that nine of the total twenty-five tokens that were listed on the exchange were actually securities.
Classification of crypto tokens
There has been a lot of controversy surrounding the treatment of different crypto tokens and a lot of arguments have been presented. If they are to be regarded as commodities, like other kinds of currency, then it would mean that they would come under the oversight of the Commodity Futures and Trading Commission (CFTC).
However, there are a lot of crypto projects that obtain their funds by selling tokens that are speculative in nature. According to Gary Gensler, the chairman of the SEC, many of these tokens are characterized as securities and they need to be regulated accordingly in order to protect the investors.
In the recent lawsuit that the agency filed for the insider trading scheme, the SEC said that a token meets the definition of a security if it requires a monetary investment in a common enterprise and profit is expected on it because of the efforts of others. This definition is outlined in the Securities Act and is called an ‘investment contract’.
It is the controversy surrounding the classification of cryptocurrencies that drove the SEC to file a lawsuit against Ripple Labs in December 2020. The company and its executives were sued by the securities regulator over its XRP token, which the agency considers unregistered security.
Meanwhile, Ripple has argued that it is not a security and is actually a commodity. The lawsuit is still ongoing and its outcome would definitely be an important one for the crypto industry. As compared to other crypto exchanges, it should be noted that Coinbase is very particular about its token listings. There are 200 tokens listed on the platform, which is significantly less than its competitors like Binance and FTX.