It seems easy to dismiss the significance of a cryptocurrency insider trading case that the U.S. Attorney for the Southern District of New York filed on July 21 against a former Coinbase Global, Inc. (NASDAQ:COIN) director and two others. After all, the action was brought against individuals, not Coinbase.
However, a parallel civil suit filed by the SEC against the three men could be much more problematic for Coinbase. The lawsuit argues that nine cryptocurrencies, including seven that can be bought and sold on Coinbase’s platform, are in fact securities that should have been registered with the SEC under the Securities Act of 1933. “Each of the crypto asset securities was offered and sold by an issuer to raise funds that would be used for the issuer’s business.”
SEC Chairman Gary Gensler believes that digital currencies should legally be considered investment contracts and should therefore be considered registered securities. Coinbase, on the other hand, believes that a cryptocurrency is a commodity like gold and therefore falls outside the authority of the regulator.
Mr. Gensler frequently says that digital currencies carry extremely high risks, an assessment that is consistent with their rollercoaster price activity over the past two years. As such, it has publicly and privately encouraged Coinbase and other (smaller) digital currency platforms to register with the SEC as stock exchanges. However, crypto exchanges have rather adamantly resisted agreeing to register.
All stocks on registered exchanges like the NYSE and NASDAQ are closely monitored by the SEC. More importantly, the regulator seeks to limit fraud and market manipulation (eg pump and dump systems). In contrast, digital currency trading platforms are currently subject to almost no oversight, allowing bad actors to remain unpenalized (perhaps until now) for such actions.
The stakes of this soap opera are much more than academic. Section 24 of the 1933 Act provides for fines and imprisonment for the willful violation of any provision of that Act. Perhaps more importantly financially, Sections 11 and 12 of the 1933 Act allow anyone injured by misrepresentation regarding the sale of a security to bring a civil action to recover the amount paid for a title, or to seek damages if the title has been sold.
Given that the prices of digital currencies have fallen dramatically over the past eight months, the potential exposure of crypto trading platforms like Coinbase to civil lawsuits could be very significant if the courts ultimately determine that digital currencies are indeed securities that should have been registered with the SEC.
Coinbase Global, Inc. last traded at US$70.82 on NASDAQ.
Information for this briefing was found via Edgar and the sources mentioned. The author has no security or affiliation related to the organizations discussed. Not a buy or sell recommendation. Always do additional research and consult a professional before purchasing a title. The author holds no license.