Coinbase under investigation after outburst against SEC

Just days after the leading U.S. crypto exchange admonished the SEC for inserting itself into an ongoing case of insider trading prosecuted under wire fraud, the company appears to find itself the subject of an investigation by Gary Gensler’s powerful agency.

Citing three people familiar with the matter, Bloomberg reported that the SEC is looking into whether Coinbase improperly allowed Americans to trade digital assets that should have been registered as securities, once again drawing attention to the legal gray area under which crypto falls.

“We are confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform,” posted Paul Grewal, chief legal officer at Coinbase, late on Monday in response to the story.

He included a link to his blog post from Friday arguing that Coinbase does not list securities: “End of Story”. 

If assets traded on Coinbase are found to fit the legal definition for securities, then Coinbase would need to register as an exchange with the SEC. 

Potentially it would mark the second time the SEC may be launching a probe into a crypto platform, since it allegedly is investigating whether Coinbase rival Binance should have registered its native token marketed under the ticker symbol BNB as a security.

It also follows last week’s news that the FBI brought charges of wire fraud in relation to insider trading against former Coinbase employee Ishan Wahi and two accomplices who made off with easily over $1 million in illegal gains thanks to the help of tokens like XYO listed on the U.S. exchange’s platform.

What seemed straightforward, however, was complicated by the SEC bringing separate charges of securities fraud, alleging that at least nine of the assets traded met the requirements without specifying which ones it meant.

Grewal blasted this as symptomatic of an attempt by the SEC to bring crypto assets under its jurisdiction without a formal process through the means of what he called “one-off enforcement actions,” effectively regulating on an ad hoc basis. One example Coinbase cited was the SEC’s controversial case against Ripple’s XRP token.

Bloomberg reported that the Coinbase probe by the SEC’s enforcement unit predates its investigation into Wahi’s insider trading.

If true, this may suggest Grewal’s statement did not trigger a response from the SEC, but rather he himself had knowledge of what was going on behind the scenes when publishing his blog post on Friday and omitted this information. 

In its 10-Q filing with the SEC, Coinbase has said it received investigative subpoenas from the SEC for documents and information about certain customer programs, operations, and intended future products, including the company’s stablecoin and yield-generating products.

“The SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution,” it said in its quarterly filing from May.

When contacted by Fortune, the SEC could not be immediately reached for a comment.

More compliance experts needed

Even after billions of dollars have been invested and more than 13 years have passed since Bitcoin first launched, the industry is still in its infancy from a regulatory perspective. 

As a result, there’s now a tug of war between the SEC and the Commodities Futures Trading Commission (CFTC) that both are staking a claim to police the high-profile crypto market on behalf of the U.S. federal government. The uncertainty revolves around whether cryptocurrencies like BNB issued by companies such as Binance should be classed as securities or commodities. 

Typically the acid test to decide whether a financial instrument can be considered a security stems from two precedential interpretations from the Supreme Court concerning U.S. statutes written in the early 1930s.

Coinbase argues this process needs to be reviewed, as none of the authors that drafted the original legislation nearly a century ago could have possibly predicted the advent of cryptographic assets that can be traded autonomously by computer programs.

Only very recently has the European Union taken the first major step to pass legislation that creates a standard set of rules across all 27 member states for the treatment of crypto assets.

Regulatory risk is a key reason why main Coinbase rival Binance only operates in the U.S. through Binance.US, a separate legal entity headquartered in California. 

On Monday, its chief executive Brian Shroder said he had doubled the size of his compliance team in a bid to “meet, and even exceed, U.S. regulations and industry standards.”