Illustration by Alex Castro / The Verge
Cryptocurrency exchange Coinbase is reportedly facing an investigation from the US Securities and Exchange Commission (SEC) over whether it allowed users to trade unregistered securities, according to a report from Bloomberg. The SECโs probe hasnโt yet been made public.
Sources close to the situation told Bloomberg that the SEC started taking a closer look at Coinbaseโs practices after the exchange added over 100 additional tokens to its platform, including Dogecoin, the joke cryptocurrency based on the Shiba Inu meme. These types of coins typically do well after theyโre first listed, but theyโre very volatile, and their value typically evaporates over time.
This investigation is separate from the SECโs case against former Coinbase product manager Ishan Wahi, his brother, Nikhil Wahi, and his friend, Sameer Ramani. The agency charged the three with insider trading earlier this month, alleging Ishan โrepeatedly tipped the timing and content of upcoming listing announcementsโ to his brother and friend, which resulted in gains of over $1.1 million. It also claims that Nikhil Wahi and Ramani purchased โat least 25 crypto assets, at least nine of which were securities.โ
Iโm happy to say it again and again: we are confident that our rigorous diligence processโa process the SEC has already reviewedโkeeps securities off our platform, and we look forward to engaging with the SEC on the matter. A refresher: https://t.co/SaacvrZEiU
โ paulgrewal.eth (@iampaulgrewal) July 26, 2022
Paul Grewal, the chief legal officer at Coinbase, disputes the SECโs claims about Coinbase listing securities in a post on Medium, citing that the Department of Justice didnโt file security fraud charges against Coinbase when indicting Nikhil Wahi, Ishan Wahi, and Sameer Ramani for insider trading. Grewal states that โnoneโ of the assets referred to in the SECโs charges are considered securities.
โCoinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange โ a process that the SEC itself has reviewed,โ Grewal writes. โThis 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.โ
In general, a security is a tradable financial asset that holds monetary value and must be registered with the SEC. The tricky part about crypto, however, is that not all digital assets are considered securities. In 2018, former SEC chairman Jay Clayton told CNBC that cryptocurrencies that replace โsovereign currencies,โ like Bitcoin and Ether, arenโt securities โ but digital assets and tokens used in initial coin offerings (ICOs) are.
If this sounds confusing, thatโs because it is. Last week, Coinbase petitioned the SEC (pdf) to clarify what exactly it considers a security, claiming the US lacks โa clear and workable regulatory regime.โ Coinbase argues that the SEC takes an โenforcement-firstโ approach, rather than establishing a set of rules for companies to abide by.
โWe are confident that our rigorous diligence processโa process the SEC has already reviewedโkeeps securities off our platform, and we look forward to engaging with the SEC on the matter,โ Grewal writes on Twitter.