The top U.S. securities regulator sued cryptocurrency platform Coinbase on Tuesday, the second lawsuit in two days against a major crypto exchange, in a dramatic escalation of a crackdown on the industry and one that could dramatically transform a market that has largely operated outside regulation.
The U.S. Securities and Exchange Commission (SEC) on Monday took aim at Binance, the world`s largest cryptocurrency exchange. The SEC accuses Binance and its CEO Changpeng Zhao of operating a "web of deception".
If successful, the lawsuits could transform the crypto market by successfully asserting the SEC`s jurisdiction over the industry which for years has argued that tokens do not constitute securities and should not be regulated by the SEC.
"The two cases are different, but overlap and point in the same direction: the SEC`s increasingly aggressive campaign to bring cryptocurrencies under the jurisdiction of the federal securities laws," said Kevin O`Brien, a partner at Ford O`Brien Landy and a former federal prosecutor, adding, however, that the SEC has not previously taken on such major crypto players.
"If the SEC prevails in either case, the cryptocurrency industry will be transformed."
In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.
The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.
Coinbase suffered about $1.28 billion of net customer outflows following the lawsuit, according to initial estimates from data firm Nansen. Shares of Coinbase`s parent Coinbase Global Inc closed down $7.10, or 12.1%, at $51.61 after earlier falling as much as 20.9%. They are up 46% this year.
Paul Grewal, Coinbase`s general counsel, in a statement said the company will continue operating as usual and has "demonstrated commitment to compliance."
Oanda senior market analyst Ed Moya said the SEC "looks like it`s playing Whac-A-Mole with crypto exchanges," and because most exchanges offer a range of tokens that operate on blockchain protocols targeted by regulators, "it seems like this is just the beginning."
Leading cryptocurrency bitcoin has been a paradoxical beneficiary of the crackdown.
After an initial plunge to a nearly three-month low of $25,350 following the Binance suit, bitcoin rebounded by more than $2,000, exceeding the previous day`s high.
"The SEC is making life nearly impossible for several altcoins and that is actually driving some crypto traders back into bitcoin," explained Oanda`s Moya.
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