Shares of Coinbase Global Inc. (COIN), America’s largest crypto exchange, tumbled Thursday morning after the firm revealed the U.S. Securities and Exchange Commission (SEC) may take legal action over the crypto exchange’s products.

Kay Takeaways

  • The Securities and Exchange Commission claims Coinbase products violate securities law and has said it could take legal action.
  • Coinbase shares dropped almost 20% early Thursday.
  • The exchange said it is confident in the legality of its products, but this is just the latest in a string of actions by regulators on the crypto industry.

Coinbase Global Inc. received a Wells notice from the SEC, signaling that the agency plans to sue on the grounds that the crypto exchange’s tokens and other products, including aspects of its staking service Coinbase Earn and Coinbase Wallet, are securities that should be registered.

This notice is the latest action by regulators that challenges crypto firms, adding further pressure on a largely unregulated industry.

Coinbase Confident

Coinbase will continue to operate as usual, and the company is confident in the legality of its assets and services, Chief Legal Officer Paul Grewal said in a statement.

The company hopes legal action would clarify the SEC’s stance on crypto, which it claims is divided within the commission. The internal divisions have resulted in uneven enforcement, the company said.

“…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.”

In response to the notice, Coinbase CEO Brian Armstrong tweeted, “While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.”

A Crypto Crackdown

Since the implosion of FTX last year, the SEC has increased its efforts to crack down on the crypto industry, and services such as Coinbase’s Earn are being scrutinized for not being unregistered.

The notice is a formal declaration that the SEC plans to bring enforcement action against the exchange. According to Coinbase, potential enforcement actions would include aspects of its spot market, as well as its Earn, Prime, and Wallet products.

Just Another Domino

Coinbase isn’t the only company on the receiving end of mounting pressure from the SEC.

In February, Kraken agreed to discontinue staking in the U.S. without admitting or denying the SEC’s allegations that the program was an “unlawful offer and sale of securities.” A Wells notice was also sent to Paxos Trust Co. alleging that the Binance USD stablecoin that it issued was an unregistered security

This week, the regulators also targeted Tron founder Justin Sun and eight celebrities for allegedly manipulating markets and violating federal securities law—reigniting arguments about whether crypto is a security that falls under the SEC’s jurisdiction.

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