Is This Finally an Atomic Bomb From the SEC?

The warning to Coinbase that it’s breaking securities laws may signal the long-awaited attack on crypto’s foundations, but also may set up a court fight that finally answers questions.

AccessTimeIconMar 23, 2023 at 10:24 p.m. UTC
Updated Mar 24, 2023 at 6:40 p.m. UTC

The U.S. Securities and Exchange Commission’s notice to Coinbase (COIN) that it’s likely to be accused of breaking securities laws could foreshadow an agency effort to break the back of the crypto sector as it now operates, but it also may finally force court rulings that define how the industry can move forward.

The so-called Wells Notice that informs Coinbase about the looming potential enforcement action is sparse on details, but it said the next steps could bring injunctions and cease-and-desist orders against aspects of its business, including its staking service and some of its asset listings. Because the company has already announced its intention to keep going, such legal orders will likely be fought in court, where judges may finally settle the questions the industry had previously hoped the SEC would answer.

“Cases need to get before judges in order to get clarity on when tokens become securities and when the trading of tokens requires registration as an exchange,” wrote Jaret Seiberg, a policy analyst at TD Cowen, in a note to clients. “The SEC bringing an action against Coinbase is a long-term positive for the space.”

Neither the regulators nor a sluggish U.S. Congress have so far produced any sector-specific rules of the road.

“Who can define what is a security? The Congress, of course, the SEC or the courts,” Caroline Pham, a commissioner at the Commodity Futures Trading Commission (CFTC), said this week at a crypto event in Washington, D.C. “And out of those three tracks I think you see courts moving the fastest,” observed the commissioner, whose agency is considered a possible leading watchdog for crypto trading.


Coinbase has so far signaled it intends to take the SEC to court.

“We remain confident in the legality of our assets and services, and, if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets,” Coinbase Chief Legal Officer Paul Grewal wrote in a company blog post.

Of course, the three-year battle between the SEC and Ripple – possibly approaching its conclusion – demonstrates that court cases can stretch out for years, and appeals can make that even longer.

For its part, the SEC’s notice was short on information about just how the company is in violation. Grewal indicated the complaint is focused on “an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.”

A spokesperson for the SEC declined to comment.

Though the SEC signed off when Coinbase became a public company with this same business model in 2021, the agency’s lawyers have slowly built a case against the exchange. Though they hadn’t yet directly confronted the public company, enforcement cases established an agency view that unregistered securities have been traded on the Coinbase platform, potentially supporting a case that the company is operating illegally as an unregistered exchange. The regulator has also pursued crypto staking as another category of unregistered securities, possibly leaving Coinbase vulnerable on that front, too.

Wells Notices are meant to give a company a chance to rebut the findings of the SEC’s enforcement staff before it pursues charges, but the “vagueness of this notice deprives Coinbase of that opportunity and lacks due process,” tweeted Brian Quintenz, a former CFTC commissioner who is now head of policy for a16z Crypto.


SEC Chair Gary Gensler has been threatening that the runway was getting short for firms to comply with rules that the industry says are fundamentally at odds with how crypto works. With Wednesday’s formal warning, Gensler may have found the end of the runway.

He claims that crypto tokens are generally securities, except for bitcoin. If registered exchanges can’t trade unregistered securities, such crypto platforms would stand empty. So the industry has so far maintained a standoff in which many advocates of virtual assets argue Gensler is setting an impossible task as a means to kill U.S. crypto.

The Coinbase development is ratcheting up that open contempt. “The SEC has abandoned its mission of protecting investors and is using fear tactics to effectuate a political power grab,” said Perianne Boring, CEO of the Chamber of Digital Commerce in Washington.

The case of Coinbase undermines Gensler’s oft-repeated rhetoric that industry players should come into the SEC to figure out how to comply, because one person familiar with the situation said that Coinbase has had dozens of direct interactions with the agency, including in-person meetings, in an attempt to find a way to meet SEC expectations. The person said the regulator declined to answer questions or respond to proposals from the company.

Before now, the SEC has pursued an array of enforcement actions against what it considered issuers of unregistered securities. Recently, those accusations have come at a furious pace, including in a settlement with crypto exchange Kraken over the staking of tokens in the U.S. But the agency hasn’t yet directly targeted a major exchange for its core business as a trading platform. Is it doing that now? The Wells Notice isn’t clear on that point.

“A reprehensible amount of resources and brainpower have been spent in the U.S. trying to engage with this SEC and trying to create substance and a path out of the wraithlike comments issued by the agency,” said Sheila Warren, CEO of the Crypto Council for Innovation. “Are we really going to allow one agency in the U.S. to set the entire trajectory of an innovation for the entire country, especially if that agency refuses to engage with the industry it is trying to regulate?”

Steering with enforcement

One senior official inside a U.S. regulatory agency told CoinDesk this week that there’s plenty of internal frustration over watching famously sluggish bureaucracies in Europe move ahead of the U.S. on crypto oversight. But rather than waiting for formal authorizations from Congress to approach digital assets on tailored turf, Gensler has chosen to use existing laws to treat those businesses exactly the same as traditional financial firms, steering their behavior with enforcement actions.

His agency also issued an investor warning on Thursday, less than 24 hours after its Wells Notice was revealed, advising that people who put their money in crypto should be prepared to lose it. The alert said that investors “may not benefit from rules that protect against fraud, manipulation, front-running, wash sales and other misconduct when intermediaries for those products do not comply with the federal securities laws that apply to registered exchanges.”

Coinbase executives took to Twitter on Thursday, where some 3,700 people tuned in to a live session to hear the company’s complaints.

CEO Brian Armstrong ended it by encouraging people to sign up to the political organization his company started, Crypto435, that’s meant to lobby members of Congress in support of digital assets.

“We’re going to ask people to show up at town halls, contact their congresspeople,” he said. “The government works for the people, not the other way around.”


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Jesse Hamilton

Jesse Hamilton is CoinDesk's deputy managing editor for global policy and regulation. He doesn't hold any crypto.