The SEC has sued Coinbase for violating securities laws. The stock is trading down by 20% pre-market.

The Securities and Exchange Commission (SEC) has filed a lawsuit against Coinbase (NASDAQ: COIN), a prominent cryptocurrency exchange, accusing the company of operating as an unregistered exchange and broker. The SEC is also alleging that 13 assets listed on Coinbase’s platform are considered crypto asset securities. The regulatory body is seeking a permanent injunction to prevent Coinbase from continuing these activities.

The lawsuit comes just a day after the SEC sued Binance, another major crypto exchange, and its founder, Changpeng Zhao. Coinbase’s stock has dropped 20% in premarket trading following the announcement. This decline adds to the 9% drop the stock experienced the previous day when the SEC unveiled charges against Binance. (CNBC)

The SEC’s complaint states that Coinbase’s prime brokerage, exchange, and staking programs violate securities laws, claiming that the company has evaded regulatory structures and failed to comply with disclosure requirements.

The SEC alleges that at least 13 crypto assets offered on Coinbase’s platform are considered “crypto asset securities.” These assets include Solana’s SOL token, Cardano’s token, and Protocol Labs’ Filecoin token. The regulator charged that Coinbase unlawfully commingled and offered exchange, broker-dealer, and clearinghouse functions despite being subject to securities laws.

Coinbase’s staking program, which allows investors to earn financial returns through the company’s efforts, is also identified as an investment contract and an unregistered security. The SEC has previously taken similar action against Kraken’s staking service.

Coinbase had previously received a Wells notice from the SEC, indicating that regulatory action was pending. The company had vigorously defended its offerings, engaging in public litigation with the SEC and preparing for potential action through advertising campaigns and publicity. The SEC’s lawsuit highlights Coinbase’s marketing and solicitation efforts as evidence that the company operates as a broker or exchange.

Many in the crypto community see Coinbase as the only entity with the financial and institutional resources to challenge the SEC. The company has positioned itself as a regulated and secure option compared to other exchanges. However, the SEC has used Coinbase’s advertising activities to support its arguments against the exchange. The case will likely involve assessments of whether Coinbase’s activities meet the criteria of a broker or exchange and whether the assets in question qualify as securities under the Howey test.

The Howey test is a legal test used in the United States to determine whether a transaction qualifies as an investment contract and, thus, is considered a security under federal law.

Related Story:  Coinbase In Hot Water As The SEC Probes Trading Of Tokens That Should Have Been Registered As Securities