In this photo illustration, the Coinbase logo is displayed on a smartphone screen.
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The Securities and Exchange Commission regulates crypto exchanges Coinbase Wells notice, warning companies that identify potential violations of US securities laws.
Coinbase shares fell nearly 12% in full trading after the news broke on Friday, adding to an 8.16% drop during regular trading hours.
“Based on discussions with staff, the Company believes this potential enforcement action will be related to aspects of the Company’s point market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “Potential civil actions may seek injunctive relief, disgorgement, and civil penalties.”
The SEC has stepped up enforcement of the crypto industry, cracking down on companies and projects that the regulator accuses of selling unregistered securities. The first reports emerged of an SEC investigation into Coinbase in mid-2022.
Months before the collapse of FTX in November, the crypto market was roiled by raising interest rates and a big move out of risk, which contributed to the collapse of the stablecoin Terra and the demise of the crypto hedge fund Three Arrows Capital and the exchange Celsius and Voyager.
Wells’ notice is usually one of the last steps before the SEC officially issues charges. They generally provide a framework for regulatory arguments and provide an opportunity to challenge the SEC’s claims.
Coinbase described the investigation as “cursory,” and said Wells’ notice provided relatively little information about the potential breach.
“While we do not take this development lightly, we are very confident in the way we run our business – the same business as the SEC so that we can become a public company in 2021,” Coinbase Chief Legal Officer Paul Grewal said in a blog post.
The company said that pending the resolution of any legal proceedings, the exchange offering will continue to operate as usual.
Coinbase executives, including founder and CEO Brian Armstrong, have pushed back against perceived overreach by the SEC, which has moved aggressively against the crypto industry since the collapse of FTX. Under the direction of SEC chairman Gary Gensler, the regulator has issued enforcement actions against several heavyweights, including Gemini, Genesis, TRON executive Justin Sun, Do Kwon, and crypto exchange Kraken.
“We are prepared for disappointing results and are confident in the legality of our assets and services,” Grewal said in a statement. “If necessary, we welcome the legal process to provide the clarity we have supported and demonstrate that the SEC is simply not fair or reasonable when it comes to its involvement in digital assets.”
The SEC sent a Wells notice to stablecoin issuer Paxos in February. “We will engage SEC staff on this matter and are prepared to litigate vigorously if necessary,” a Paxos spokesperson told CNBC at the time.
Grewal said Coinbase is looking for more regulatory clarity.
“Tell us the rules and we will follow them,” he said. “Give us a real path to register, and we will register the part of our business that needs to be registered.”
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