Coinbase Global Inc. is encountering a US probe into whether it inappropriately let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter.
The US Securities and Exchange Commission’s scrutiny of Coinbase has risen since the platform expanded the number of tokens in which it offers trading, said two of the people, who asked not to be named because the inquiry hasn’t been disclosed to the public. The probe by the SEC’s enforcement unit precedes the investigation of the agency into an alleged insider trading scheme that led the regulator last week to sue a former Coinbase manager and two other people. The SEC and Coinbase denied commenting.
The drumbeat in Washington for US regulators to do more to oversee crypto has grown louder as digital currencies have fallen from all-time highs, taking away hundreds of billions of dollars in market value. SEC Chair Gary Gensler has homed in on trading platforms and argued that they should be doing more to protect investors in the retail segment. As the largest trading platform in the United States, Coinbase lets Americans trade more than 150 tokens. If those products were deemed securities, the firm could need to register as an exchange with the SEC.
Coinbase has constantly clashed with the agency on how it oversees the industry, and the firm last week called on the SEC to propose transparent rules. Meanwhile, after taking a relatively vigilant approach for years, Coinbase has boosted its token offerings.
On July 21, tensions surfaced further when the SEC accused one of the former employees at the company of violating its insider-trading rules by leaking information for helping his brother and a friend to buy tokens just before they were listed on the platform. While the agency didn’t allege lawlessness by Coinbase, the SEC said it had intended that nine of the dozens of digital tokens the men traded were securities — including seven the exchange says it lists.
In Manhattan, federal prosecutors also charged the three men with wire fraud conspiracy and wire fraud. In response, Coinbase published an entry on its blog titled: “Coinbase does not list securities. End of story.” Chief Legal Officer Paul Grewal indicated that the Justice Department chose not to file securities fraud charges instead of reviewing the same facts as the SEC. He also said before listing tokens, Coinbase makes analysis whether an asset could be considered a security and “also considers regulatory compliance and information security aspects of the asset.”
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