SEC’s Crackdown On CEXes: Understanding the Effects on Coinbase

Key Insights

• The SEC sued Coinbase for allegedly failing to register as a broker and offering securities without proper authorization.
• The SEC's actions against Coinbase and Binance could be seen as a crackdown on the crypto industry as a whole.
• The lawsuit could have significant implications for the future of the crypto industry
• At the end of the day, Centralized exchanges may be able to survive and thrive if they can balance compliance with innovation.

Coinbase, the largest cryptocurrency exchange in the U.S., is facing a lawsuit from the SEC over its alleged failure to register as a broker.

According to the lawsuit, the SEC has also accused the exchange of offering securities without proper authorization.

This filing was served up on Tuesday in New York, less than a day after the SEC sued Binance, the world's largest cryptocurrency exchange for "mishandling customer funds" and "misrepresenting" to American regulators and investors about its operations.

These regulations may be justified.

However, the SEC suing some of the largest crypto organisations over the years is starting to look like a coordinated attack of some kind, against crypto itself.

We'll explain what this means soon:

What is Coinbase Accused Of?

According to the SEC, Coinbase has been allowing its customers to trade unregistered securities through its main crypto trading platform, Coinbase Prime, and the Coinbase Wallet.

Tokens for numerous blockchain projects, such as Solana (SOL), Axie Infinity (AXS), Polygon (MATIC), The Sandbox (SAND), and Chiliz (CHZ), are among these securities that the exchange is being sued for.

And according to the SEC, these tokens are being marketed and sold as investment contracts (also known as securities), in violation of federal securities laws.

The SEC also claims that Coinbase failed to register its "staking-as-a-service" enterprise, which lets consumers earn money by participating in "proof of stake" blockchains.

According to the SEC, they have sued Coinbase because the programs the exchange is running involve issuing and selling securities that represent interests in the underlying blockchains.

Is This A Crackdown On Crypto Itself?

The SEC's regulatory actions against Binance and Coinbase (two of the largest crypto organizations in the US) have been tagged as part of a necessary evil.

Something that has to be done, like a larger campaign to stop the "age of lawlessness" and what the SEC chairman, Gary Gensler tagged on Tuesday as the "wild west" of investing.

With these and other actions, the SEC has attempted to reform the crypto sector by trying to reform the crypto industry by enforcement, while excluding and suing the people and corporations it considers bad actors.

The S.E.C. mentioned in Tuesday's filing, how Coinbase's officials showed that they understood how the marketing and sale of digital assets should be handled under US law and still failed to obey the rules.

And as of Tuesday after getting sued, the shares of Coinbase's parent company, Coinbase Global Inc, were down $9.37, or 16.2%, at $49.33, after falling as low as 20.9% earlier.

Following the Securities and Exchange Commission's cases against Binance Holdings Ltd. and Coinbase Global Inc., the list of digital tokens designated unregistered securities has now surpassed $120 billion in crypto.

In its charges against Binance and Coinbase, the agency named more than a dozen prominent cryptocurrencies as assets under its jurisdiction.

And so far, exchanges and other crypto platforms are reluctant to list them, for fear of getting sued like Binance, Coinbase, Kraken and a host of others.

How Has Coinbase Responded?

Coinbase has not yet commented on the lawsuit, but its CEO Brian Armstrong and chief legal officer Paul Grewal previously responded to the SEC's "Wells notice" of securities law violations.

Grewal wrote in a blog post, "Coinbase does not list securities or offer products to our customers that are securities… We remain confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets."

Armstrong has also expressed his frustration with the SEC's actions, saying that they are creating an "unfair market" and "harming consumers" by not providing clear guidance on what constitutes securities in the crypto space.

What Are The Implications Of The Lawsuit?

The lawsuit could have significant implications for the future of the crypto industry, as it could set the tone for how the SEC regulates other crypto platforms and tokens in the future.

The SEC has been ramping up its enforcement actions against crypto companies in recent months, signalling its intention to "bring more clarity and oversight" to the fast-growing but largely unregulated crypto market.

The lawsuit will likely affect Coinbase and the others' stock prices, which are already suffering to begin with, as of Tuesday after the news broke.

Coinbase went public in April through a direct listing, becoming one of the most valuable crypto companies in the world.

However, the exchange has faced several challenges since then, including customer complaints, regulatory scrutiny, and competition from other platforms.

The lawsuit could also impact the adoption and innovation of crypto technologies, especially those that rely on decentralized networks and governance.

And if this happens, the SEC's actions might be what stifles innovation and drives away talent and capital from the U.S. to more crypto-friendly countries.

Are Centralized Exchanges (CEXes) At Risk Of Survival?

We can all agree that the crypto market is largely unregulated and has a lot of room for scammers, exploiters and other bad actors.

However, the SEC has come under fire, for the way it has been running its "regulation by enforcement" scheme.

CEXes often offer new products and features that attract users and increase liquidity, such as lending, staking, margin trading, futures, options, and tokens for various blockchain projects.

However, there might be a problem with this, because the SEC can show up at any time with a lawsuit, claiming that any one of these is a security.

For example, Coinbase's Lend program, which allows users to earn interest on their crypto holdings, was deemed a security by the SEC.

At the same time, Binance's tokens for stocks like Tesla and Apple were also deemed securities by regulators in several countries in 2022.

These challenges pose a threat to the survival of CEXes in the long term, leading to legal actions, regulatory scrutiny, reputational damage, customer loss, or even shutdowns if they fail to comply with the rules or secure their platforms.

CEXes may also lose their competitive edge to decentralized exchanges (DEXes), which offer more transparency, autonomy, and innovation to their users.

However, CEXes may still survive and thrive if they can balance compliance with innovation, maintain security and trust, and leverage their strengths and opportunities.

Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.