International Tax Panorama

The Securities and Exchange Commission issued crypto exchange Coinbasea Wells notice, warning the company that it identified potential violations of U.S. securities law.

According to a blog post published by Coinbase earlier today, this notice comes after a brief investigation into unspecified digital assets listed on Coinbase and its staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet. 

Coinbase’s defence

Coinbase claims that the SEC has provided little information on the potential violations of securities laws and that it has repeatedly asked the SEC to clarify which assets on its platform may be considered securities. 

Despite several proposals from Coinbase to register with the SEC, the regulator has allegedly declined to provide feedback.

Coinbase says it has met with the SEC more than 30 times over nine months to discuss a registration path, and the exchange continues to emphasize that it does not list securities on its platform.

Stacking services aren’t securities

The exchange maintains that its staking services are not securities under any legal standard, including the Howey test.

Staking is a process in which cryptocurrency holders volunteer to take part in validating transactions on the blockchain. These products often offer customers eye-popping yields.

Impact on Coinbase

Coinbase shares fell nearly 12% in extended trading after the news broke on Wednesday, adding to an 8.16% drop during regular trading hours.

SEC’s regulation over other Crypto firms in the past

The SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. 

The SEC has been ratcheting up efforts to crack down on the crypto industry since the implosion of FTX last year, and staking services such as Coinbase’s Earn are under increased scrutiny for not being registered.

Last month, Kraken agreed to shut down its U.S. cryptocurrency staking service and pay $30 million in penalties to settle SEC charges that it failed to register the program.

Just last month, Paxos received a Wells Notice from the SEC for its role in issuing and managing the reserves for Binance USD (BUSD), a U.S. dollar-pegged stablecoin.

Earlier in the day, the SEC charged Chinese cryptocurrency entrepreneur Justin Sun with fraud, and accused eight celebrities including actress Lindsay Lohan with illegally promoting his crypto assets.

What are the consequences of a Wells notice?

A Wells notice is typically one of the final steps before the SEC formally issues charges. It generally lays out the framework of the regulatory argument and offers the potentially accused an opportunity to rebut the SEC’s claims.

Will it impact US Crypto Regulation

As the US crypto regulatory landscape remains uncertain, Coinbase urges regulators to establish clear rules and registration paths for the industry. The company warns that threatening enforcement actions against compliant actors will drive innovation, jobs, and the entire industry overseas. Coinbase remains confident in the legality of its assets and services and is prepared to engage in a legal process to demonstrate the SEC’s unfair and unreasonable approach to digital assets.