Because of Its Earn Program, Wallet Service, and Exchange Activity, the SEC is Investigating Coinbase

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Last Updated on March 23, 2023 by Bitfinsider

The Securities and Exchange Commission issued a Wells Notice to exchange giant Coinbase, informing it of inquiries into several offerings and adding to a string of regulatory warnings directed at crypto companies operating in the United States.

The company stated in a blog post that the notice pertains to elements of its exchange, staking service, Coinbase Earn, and Coinbase Wallet.

Coinbase said: “Today, the SEC gave Coinbase a ‘Wells Notice’ regarding aspects of the company’s exchange, our staking service Coinbase Earn, and Coinbase Wallet after a cursory investigation.”

The company stated: “Today’s Wells Notice does not provide a lot of information for us to respond to”. “The SEC staff told us they have identified potential violations of securities law, but little more,” they added.

Coinbase also said that business as normal would apply to its products and services. A Wells Notice is a document that the regulator sends to entities that are the subject of an investigation; it does not always indicate a finding or predetermined course of action.

Paul Grewal, chief legal officer at Coinbase, said in a statement, “We are prepared for this disappointing result and confident in the legality of our assets and services. If needed, we welcome a legal process to provide the clarity we have been advocating and to demonstrate that the SEC has not been fair or reasonable in its engagement on digital assets.”

The business has met with the SEC more than 30 times in the past nine months alone, according to the blog post, but it has not responded. More than 90% of the assets that applied to be listed on the site were rejected, it continued.

The news is released as regulatory oversight of staking and other goods increases. Competitor exchange Kraken agreed to shut down its U.S. activities and pay a $30 million fine after settling a case with the SEC in February over allegations regarding its staking-as-a-service program. As a result of the company’s expectation of profit from the staking-as-a-service initiative, the regulator accused the company of selling unregistered securities. Coinbase has stated in the open that its own staking action complies with US securities law.

Grewal stated in a post shortly after the SEC’s settlement with Kraken that “staking is not a security under the U.S. Securities Act, nor under the Howey test, which the SEC uses to determine whether an investment contract is a security.”

The SEC sought to further clamp down on passive investment offerings after several high-profile failures left customers in court trying to reclaim their funds. The move was a sign of more problems for crypto companies in the U.S.

The notification also comes after Ishan Wahi, a former product manager for Coinbase, pleaded guilty to wire fraud-related charges in February.

The SEC has argued that the nine tokens in question are securities, but that they are not properly registered. This guilty plea may put an end to a legal debate in separate civil charges filed by the SEC. Wahi’s attorneys submitted a motion to dismiss the lawsuit. According to the Justice Department, Wahi earned over $1 million by informing his friend and brother about which tokens would be available for trading on Coinbase. Wahi is anticipated to be sentenced in the upcoming months, so the legal case is still active.

The industry might be left in a pickle in that scenario. The SEC could extend that to other market participants trading them if the judge determines that one of the tokens in question is a security, according to experts. The attorneys claimed that the tokens were not securities in their motion to dismiss the case and issued a general caution.

Before the criminal and civil indictments, Coinbase had looked into Wahi’s behavior and was found to be innocent.

Following the announcement, Nasdaq-listed Coinbase’s stock fell as much as 11.6% in after-hours trading, trading at roughly $70.80. Its equity price at this time last year was $183.00.

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