It seems easy to dismiss the significance of a cryptocurrency insider trading case that the U.S. Attorney for the Southern District of New York brought on July 21 against a former Coinbase Global, Inc. (NASDAQ: COIN) manager and two others. After all, the action was brought against individuals, not against Coinbase.
However, a parallel civil suit brought by the SEC against the three men could be much more problematic for Coinbase. The suit contends that nine cryptocurrencies, including seven that can be bought and sold on Coinbase’s platform, are actually securities that should have been registered with the SEC under the Securities Act of 1933 (1933 Act). “Each of the crypto asset securities were offered and sold by an issuer to raise money that would be used for the issuer’s business.”
The Chairman of the SEC, Gary Gensler, believes that digital currencies should legally be considered investment contracts and should therefore be considered registered securities. Coinbase, on the other hand, thinks a cryptocurrency is a commodity like gold, and therefore falls outside of the regulatory body’s authority.
Mr. Gensler frequently says digital currencies carry extremely high risks, an assessment which is consistent with their roller coaster price activity over the last two years. As such, he has publicly and privately encouraged Coinbase and other (smaller) digital currency platforms to register with the SEC as securities exchanges. However, the crypto exchanges have rather adamantly resisted agreeing to become registered.
All actions of registered exchanges like the NYSE and the NASDAQ are closely scrutinized by the SEC. Most importantly, the regulatory body seeks to limit fraud and market manipulation (e.g., pump and dump schemes). In contrast, digital currency trading platforms currently are subject to almost no oversight, allowing bad actors not to be penalized (perhaps until now) for such actions.
The stakes in this soap opera are far more than academic. Section 24 of the 1933 Act calls for fines and prison terms for willful violations of any provisions of this law. Perhaps more importantly on a financial basis, Sections 11 and 12 of the 1933 Act allow anyone hurt by false declarations regarding the sale of a security to file a civil suit to recover the amount paid for a security, or to file for damages if the security has been sold.
Since digital currency prices have dropped dramatically over the last eight months, the potential exposure of crypto trading platforms like Coinbase to civil suits could be very significant if the courts ultimately determine digital currencies are indeed securities which should have been registered with the SEC.
Coinbase Global, Inc. last traded at US$70.82 on the NASDAQ.
Information for this briefing was found via Edgar and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.