Shockwaves were sent through the cryptocurrency industry this week when the Securities and Exchange Commission filed a lawsuit against one of the largest crypto exchanges operating in the U.S.
On Tuesday, the SEC filed a lawsuit in federal court in New York against Coinbase. The suit alleges that the exchange has been acting as an unregistered broker. The agency is demanding that Coinbase be “permanently restrained and enjoined” from operating as it is right now.
That marked the second day in a row that the SEC targeted a crypto exchange. On Monday, charges were filed by the agency against Binance – another large crypto exchange – as well as the founder of the company, Changpeng Zhao.
As a result, Coinbase stock dropped 9% on Monday and then another 12% on Tuesday, as many investors fear an all-out collapse like what happened with FTX.
On Tuesday, Gary Gensler, the chair of the SEC, said:
“These trading platforms, they call themselves exchanges, are commingling a number of functions. We don’t see the New York Stock Exchange operating a hedge fund.”
In the complaint it filed, the SEC said that Coinbase is operating brokerage, exchange and staking programs that are in violation of U.S. securities laws. Coinbase “has for years defied the regulatory structures and evaded the disclosure requirements” of those laws, the agency said.
The SEC is claiming that 13 crypto assets that are available to customers on the platform are considered “crypto asset securities,” which would require Coinbase to be registered with the agency.
In his statement, Gensler said:
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer and clearinghouse functions.”
In the immediate aftermath of the lawsuit being announced, the largest cryptocurrency exchange in the world, Bitcoin, dropped below $26,000, and hit the lowest level it’s been since back in March. It dropped 5.5% on Monday, and Ether – another large exchange – dropped 5.1%.
In the days since, though, Bitcoin has rebounded, reaching back above $26,000. In fact, at one point on Tuesday, it actually eclipsed the $27,000 mark.
It’s not that cryptocurrency investors aren’t worried about the industry as a whole, most trading experts say. It’s that investors are starting to shy away from the so-called alt-coins that are available on Coinbase – such as Solana, Cardano and Filecoin, all of which the SEC says are securities – and moving toward the “big boys” such as Bitcoin.
In other words, Bitcoin may actually benefit from this news, at least in the short run, while a lot of other smaller crypto assets suffer.
That being said, one of the biggest concerns now in the crypto market is what will happen with investors’ money. This isn’t at all the situation that happened with FTX, when that exchange collapsed overnight due to fraud charges against its founder Sam Bankman-Fried, who’s facing numerous federal charges.
In that case, funds that the exchange held vanished. This isn’t happening with Coinbase or Binance.
At the same time, though, the outcome of these SEC lawsuits could have a huge effect on what crypto investing in the U.S. looks like for the future.