Coinbase receives SEC warning about potential legal action

The Securities and Exchange Commission has notified US-listed crypto exchange Coinbase that it is considering enforcement action against the company as the regulator continues its crackdown on digital assets.

The regulator has issued Coinbase a Wells notice, which warns companies they may face enforcement action in the future. The notice says the SEC has made a “preliminary determination” to recommend action against Coinbase, according to a copy seen by the Financial Times. A potential civil action may involve a request for an injunction, a cease-and-desist order or civil money penalties, among other measures.

The Wells notice is the latest in a growing line of actions the SEC has taken against prominent crypto companies in the US as the agency’s chair, Gary Gensler, takes a tougher stance on an industry he deems largely non-compliant with securities law. Since the start of this year, the financial markets watchdog has fired off a blitz of enforcement actions, including suing lender Genesis and exchange Gemini for failing to register a crypto lending scheme as a securities offering.

The regulator has also sued collapsed stablecoin operator Terraform Labs, and chief executive Do Kwon, for allegedly arranging a crypto fraud that led to billions of dollars in losses. On Wednesday, the agency sued crypto entrepreneur Justin Sun as well as a host of celebrities it alleged had improperly touted digital assets.

Earlier this year, Coinbase reached a $100mn settlement with New York regulators over alleged anti-money laundering failures. In 2021, the company dropped plans to launch a digital asset lending product after the SEC had warned it would constitute an unregistered security and that it would have sued the platform if the exchange followed through on the debut.

In a blog post published on Wednesday, Coinbase’s chief legal officer Paul Grewal said Coinbase “asked the SEC for reasonable crypto rules for Americans”, but “got legal threats instead”. Grewal said Coinbase is confident in the legality of its assets and services.

Coinbase chief executive Brian Armstrong on Twitter said that “after years of asking for reasonable crypto rules, we’re disappointed that the SEC is considering courts over constructive dialogue. But if courts are required, so be it.”

Coinbase shares fell 13 per cent in after-hours trading.

A person familiar with the matter said Coinbase has met with the SEC roughly 60 times during the past nine months. According to the Wells notice, the exchange has until April 5 to set forth any reasons why enforcement action should not be filed.

The SEC declined to comment.