SEC Launches Probe into Coinbase Over Alleged Securities Listing: Report

The popular crypto exchange Coinbase is facing a new SEC probe investigating whether it let Americans trade digital assets that should have been registered as securities, according to a Bloomberg report citing people familiar with the matter

A possible investigation relates to the insider trading case launched by the U.S. Securities and Exchange Commission (SEC) last week when the regulator accused one of Coinbase’s former employees of violating the company’s insider trading rules by tipping off his brother and a friend on upcoming token listings.

Although the SEC didn’t allege any wrongdoing by Coinbase at the time, the agency said it had determined that nine tokens traded by the individuals accused of insider trading contained "hallmarks of the definition of a security."

Of those nine digital assets mentioned by the SEC, seven are currently still listed at Coinbase.

To determine whether a digital asset is a security, the SEC applies the so-called Howey Test—a set of standards that an investment must meet for the agency to consider it a security and regulate it as such.

Under that framework, the SEC considers a token to be under its purview when it involves investors pledging their money to fund an enterprise with the intention of making profits from the efforts of that organization.

Previously, the SEC said that it does not consider Bitcoin (BTC), the industry's largest cryptocurrency, to be a security, nor did the agency classify Ethereum as such.

The SEC, however, weighed in other cryptocurrencies, such as Ripple’s XRP, slapping the creators of the seventh biggest digital asset by market cap, with a $1.3 billion lawsuit in December 2020.

Gary Gensler, the SEC chair, also argued last year that Coinbase may be breaking the law by listing “ dozens of tokens that might be securities."

Coinbase hits back

Responding to the Bloomberg report, Coinbase’s chief legal officer Paul Grewal took to Twitter to deny the exchange is listing unregistered securities.

“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,” wrote Grewal.

In a blog post last week, the San Francisco-based firm said that “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.”

“Coinbase does not list securities on its platform. Period” added the blog post.

Prior to that, Coinbase said the company had filed a petition with the SEC to improve "rulemaking on digital asset securities."

Per the company, the “petition calls on the SEC to develop a workable regulatory framework for digital asset securities guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.”