Coinbase, one of the most prominent cryptocurrency exchanges, saw its shares drop by 15% to $47.10 on Tuesday after the US Securities and Exchange Commission (SEC) sued the company for allegedly violating federal securities laws. The SEC accused Coinbase of acting simultaneously as an unregistered exchange, broker and clearing agency, accusing the firm of soliciting customers, handling bids and orders, and acting as an intermediary without proper registration. The suit comes after the SEC issued a Wells Notice to Coinbase in March, warning the company of impending legal action. Coinbase responded by refuting the allegations in April.
The suit is expected to be a lengthy and costly legal battle for Coinbase, with experts predicting that it will be difficult for the company to argue and prove that it did not commingle and unlawfully offer exchange, broker-dealer, and clearinghouse functions. Coinbase’s major shareholders include The Vanguard Group, Fidelity, and BlackRock, among others. Cathie Wood’s ARK Invest added 301,437 shares of Coinbase to its ARK Innovation ETF (ARKK) in March, bringing its total holdings to about 11 million shares.
Coinbase is not the only cryptocurrency exchange to face legal action from the SEC. The regulator also sued Binance, the largest cryptocurrency exchange by trading volume, for similar reasons on Monday. The news also caused Binance’s native token, BNB, to plunge by almost 20% within 24 hours. Furthermore, Robinhood Markets, a popular brokerage platform, also saw its shares drop by 3% after the news emerged. The company reported first-quarter cryptocurrency trading revenue of $38 million.
The legal action against Coinbase is a significant development in the cryptocurrency market, showing that regulators are closely monitoring the sector. It is also a reminder to other exchanges that they need to be cautious and ensure that they comply with US securities laws. While there were concerns in the industry about the SEC’s approach to cryptocurrency, it appears that the regulator is taking a proactive stance towards bringing greater transparency and consistency to the sector.