Coinbase vs. SEC: Everything You NEED To Know!

The SEC has done it again part two Shortly after suing binance the Anti-crypto regulator then sued coinbase Like the lawsuit against binance the Lawsuit against coinbase was predictable The Exchange had received a Wells notice From the SEC back in March Unlike the lawsuit against binance the Suit against coinbase focuses on alleged Violations of Securities laws a Surprising move considering the SEC Approved coinbase's stock for trading so Today I'm going to summarize the sec's Lawsuit against coinbase give you my Take on which party will win and explain What impact either outcome could have on The crypto Market I'll start by saying that today's Summary focuses on the sec's allegations Against coinbase not the sec's reasoning Around why some of the cryptos coinbase Lists are securities This is because the SEC singled out a Similar list of cryptocurrencies in its Lawsuit against binance which we covered Yesterday that video will be in the Description That said the sec's lawsuit against Coinbase begins with a short summary it States that coinbase is the largest Crypto Exchange in the United States and That it has a whopping 108 million users The SEC takes issue with the fact that Coinbase has combined exchange functions

Which are traditionally segregated now For context regular exchanges consist of A broker the actual exchange and a Clearinghouse which settles transactions These three entities must register with The SEC the authors of the lawsuit note That coinbase combined these functions And has failed to register as either a Broker exchange or Clearinghouse The authors then allege that coinbase Did this to evade regulatory scrutiny Because it means that they didn't have To provide the disclosures that come With registering as a regular broker Exchange or Clearinghouse They failed to mention that coinbase Provides disclosures as a publicly Traded company In any case the filing alleges that Coinbase is therefore an unregistered Broker an unregistered exchange and an Unregistered Clearinghouse it adds that Coinbase has acted as an unregistered Broker in two additional ways through Coinbase prime a crypto broker and the Coinbase wallet now the reason why they Include the coinbase wallet is because It makes it possible to swap between Assets using decentralized exchanges Note that the SEC is working on new Rules that would give it the authority To crack down on D5 these were announced In April but have not yet been Implemented

Now the authors then allege that Coinbase has made Securities available To retail investors on its exchange on Its prime platform and on the coinbase Wallet this is scary because it suggests That other crypto wallet providers based In the United States could also face Regulatory scrutiny from the SEC What's even scarier is they allege that Coinbase's staking program constitutes a Securities offering their reasoning is That coinbase provided an expectation of Profit when its users gave it coins and Tokens to stake on their behalf even Though this expectation exists Independent of coinbase In their summary of the violations Coinbase allegedly committed the authors Focused on the exchange having not Registered as a broker exchange or Clearinghouse along with its staking Services this is interesting because it Suggests that the scrutiny of the Coinbase wallet isn't a primary focus Regarding the relief sword the SEC Basically wants coinbase to cease Further operations until it registers With the regulator and to quote Discourage its ill-gotten gains this is Code for paying a very large fine which Could easily run into the billions if The SEC wins we'll come back to that Possibility later Now in the next section the lawsuit's

Authors provide some legal background For starters quote Investment contracts are instruments Through which a person invests money in A common Enterprise and reasonably Expects profits or returns derived from The entrepreneurial or managerial Efforts of others This quote contains the four criteria of The Harry test which is used by the SEC To determine if an asset is a security In plain English you invest in it using Money the price action is the same for Everyone who invests you expect to make A profit and this expectation comes from A third party For reference all cryptocurrencies meet The first three criteria but not all of Them meet the fourth Criterion this Ultimately depends on whether Regulators Can concretely identify a third party Creating an expectation of profit from Buying a coin or token for some cryptos This is possible and for others it's not They explain that Securities laws Specifically those in the Securities act Give the SEC the power to regulate Intermediaries offering Securities Including Brokers exchanges and Clearinghouses They add that the ACT gives the SEC the Power to create new rules to protect Investors accessing these entities This is ironic considering that they

Seem to acknowledge that coinbase is None of the above clearly the SEC is Dealing with a radically different Intermediary and with radically Different assets This is why many have called for Crypto-specific regulations but these May not come anytime soon in the U.S The lawsuit's authors then go over the Registration processes for Brokers Exchanges and clearinghouses and argue That these registration processes are Required for investor protection In reality they're mostly designed to Protect existing financial institutions From competition from say cryptocurrency Exchanges On that note they provide some Background about the crypto industry too They explain what cryptocurrencies are And how they work including Cryptocurrency wallets That reminds me now is a good time to Get your hands on a hardware wallet if You don't have one already and you can Get discounts on the best hardware Wallets on the coin Bureau deals page Link is in the description Anyhow Shilling aside the authors point Out that some cryptocurrencies have been Distributed via initial coin offerings Or icos they note that quote some Issuers continue to sell the crypto Assets after the initial offer and sale

Including directly or indirectly by Selling them on crypto asset trading Platforms now this is interesting Because it implies that any selling of Coins or tokens by entities affiliated With the creation of a crypto project Makes those coins and tokens Securities If this is the case then literally every Single cryptocurrency besides BTC is a Potential Target something that SEC Chairman Gary Gensler has said when it Comes to crypto exchanges the authors Imply that they provide a series of Services to investors including Brokerage trading and settlement they Allege that coinbase quote doesn't not Segregate a customer's crypto assets From other customers or the firm's Assets Now this contradicts coinbase's Recent claims that both are segregated The contradiction could be a consequence Of a new crypto custody rule the SEC has Proposed one where only so-called Qualified custodians can safely store Coins and tokens which of course Excludes crypto companies The authors then explain that the SEC First asked crypto exchanges to register With the regulator in 2017 when it Published the Dow report This is peculiar when you consider that The SEC alleges coinbase only started Violating Securities laws with its Products and services in 2019

This ties into the next section of the Lawsuit which is aptly titled facts the Authors note that coinbase has been Around since 2012 that its coinbase Prime service was released for Institutional investors in 2021 and that Its coinbase wallet was released to both Retail and institutional investors in 2017. amazingly the authors acknowledge That coinbase does not control the Assets in the coinbase wallet because It's non-custodial logically this means They take issue with the assets coinbase Offered in its wallet something they Seem to imply a little later again scary Stuff for crypto wallets in the US The same scrutiny seems to apply to the Cryptos that coinbase offered they note That there were just 55 cryptos offered By coinbase in April 2021. by March 2023 That number had swollen to over 250. I Must admit that I was a bit shocked to See which crypto's coinbase had been Listing over the last year If you watched our video about whether Your favorite altcoin will be listed on Coinbase you'll note that the exchange Seems to have had some super strict Criteria it certainly begs the question Of why it started listing random small Cap cryptos last year I think the answer Is probably staring us right in the face Anyways it appears that the SEC takes Issue with the fact that coinbase made

Money from the Dex trades happening on The coinbase wallet they also have a Problem with the wording in one of Coinbase's SEC disclosures something That's again ironic considering that it Acknowledges coinbase does indeed do Disclosures They go on to argue how coinbase Provides brokerage custody and Settlement Services oddly enough they Seem to take issue with the fact that Coinbase had lots of educational info About crypto on its site The authors again argue that coinbase is Acting as a broker via the coinbase Wallet but the more I think about it the Less sense it makes users are Interacting with the dexes not which Coinbase this of course assumes that Coinbase isn't playing some role as an Intermediary which admittedly does seem To be the case This relates to title III of the lawsuit Which specifies that coinbase not only Offered Securities on its exchange but Also on its coinbase prime service and On the coinbase wallet The authors start by saying that Coinbase has been aware of the Howie Test for years and used it as part of Its listing criteria they have an issue With the fact that coinbase asked crypto Projects to answer questions about the Harry test as part of their listing

Applications they even take issue with The fact that coinbase co-founded the Crypto ratings Council which rates how Security-like cryptos are on a Five-point scale This seems to be because the crypto Ratings Council references a public Document by the SEC which effectively Provides regulatory clarity about which Cryptos count as Securities this is Ironic considering that its irrefutable Evidence of coinbase actively trying to Be compliant with Securities regulations The suits authors then point out that The number of cryptos offered by Coinbase began to grow quickly after the Crypto ratings Council was established In 2019. they allege that some of the Cryptos coinbase listed had Characteristics of a security as per the Crypto ratings council's own Securities Criteria yikes they also allege that Coinbase coached crypto projects on how They should change so that they don't Meet the four criteria of the Howie test The SEC made similar accusations in its Lawsuit against bittrex which we also Summarized the link to that video will Also be in the description Anyhow the suit's authors then point out That coinbase acknowledged in its Disclosures that some of the assets Products and services it offers could be Classified as Securities or Securities

Offerings by the SEC the authors provide An excerpt of this acknowledgment which Could give an idea of what coinbase's Defense will look like the biggest Takeaway is that the sec's definition of What a security is still isn't clear When it comes to crypto and the Regulator rarely provides guidance about Which cryptos are securities What's interesting is that coinbase Claims that it doesn't need to register With the SEC because it doesn't list Securities in other words the only Reason why Brokers exchanges and Clearinghouses have to register with the SEC is because they're handling Securities like for instance stocks Coinbase doesn't list cryptos that are Classified as Securities as such it Doesn't have to register with the SEC as A broker exchange or Clearinghouse now Obviously the SEC is arguing that Coinbase is listing cryptos that are Classified as Securities and it must Therefore register as a broker exchange Or Clearinghouse they specify that the SEC considers Sol Ada Matic fill sand AXS chz flow ICP near vgx Dash and nexo To be Securities notably the authors Point out that coinbase listed these Securities on its range coinbase prime Or the coinbase wallet I should note That the authors appear to use cardano As their primary example of a security

Throughout the lawsuit this is Concerning because it suggests Ada is Facing extreme scrutiny the Silver Lining is that they provide a Comprehensive list of specific things That the SEC looks at when determining If a cryptocurrency is a security these Include An identifiable set of promoters and or Developers including the people who Created the crypto project a white paper For the project a website for the Project social media channels for the Project and anything related to the Price action of the coin or token in or By any of the above In short then everything besides BTC They then add that coinbase had Previously offered cryptos that the SEC Had determined to be Securities Including amp DDX lcx OMG power rally And xyo The authors assert that if they can Prove coinbase offered at least a single Security during the relevant period then It's case closed For good measure the authors present 12 Cryptocurrencies they consider to be Securities the ones I mentioned a few Moments ago Seoul Ada Etc Now I suspect that the reason why the List is different in the binance lawsuit Is because the sec's case against Coinbase hinges on one of these being a

Security in binance's case there are Lots of other factors let's leave it at That not surprisingly the sec's Reasoning about why these cryptos are Securities is essentially the same as in The binance lawsuit the only difference Is the inclusion of CHC flow ICP near Vgx Dash and nexo and the omission of Atom BNB busd and koti I can't say I Know why atom and Cody were emitted Now towards the end of the lawsuit the Authors return to the topic of staking They clarify that yes they take issue With the fact that coinbase quote Performs all of the efforts necessary And expected by investors to obtain Investment returns including staking Those assets in order to obtain Rewards They then explain what proof of stake is And how staking works Thankfully they don't say anything that Implies that proof-of-stake cryptos Themselves are securities this is Something that Gary has implied on Multiple occasions namely around the Times that ethereum was in news The lawsuit's authors reiterate that They have an issue with the fact that Coinbase's staking service contained Features that users would not have had They staked on their own these include Low or no staking minimums no Hardware Requirements low or no lock-ups for Staked crypto and faster payout of

Staking Rewards For what it's worth the SEC doesn't say That staking itself is a violation of Securities laws meaning that you can Still do it without fear in the US if You plan on staking using a third party However there could be problems and it's Possible that liquid staking D5 Protocols will soon face the same SEC Scrutiny note that there were rumors Floating around that Lido Finance had Been handed a Wells notice by the SEC Next the authors go on to detail exactly Why it is that coinbase's staking Service constitutes an investment of Money in a common Enterprise with an Expectation of profits coming from a Third party they then conclude by saying That coinbase has failed to register This Securities offering with the SEC so This brings me to the two big questions Who will win this lawsuit and how would Either outcome impact the crypto Market Well before I give him my answers you Should know that we still haven't seen Coinbase's legal response and the court Case itself could reveal additional Facts to consider As the facts stand now though it looks Like the SEC could win this one this is Simply because it just needs to prove That one of the hundreds of cryptos that Coinbase offers is a security if Coinbase doesn't find a way to get the

Coinbase wallet part pulled out then the SEC has thousands more it can Target From where I'm standing the chances of At least one crypto on coinbase being a Security are very high even if there Isn't one the SEC can shift its focus to Coinbase's staking Services which in my Humble opinion do seem to meet the Criteria of the Howie test but I could Very well be wrong here If I happen to be right then it means That all crypto exchanges in the US Would either get sued or shutter their Operations and leave the result is that BTC would be the only crypto accessible To investors in the United States plus Any other cryptos the SEC decides are Not Securities still waiting on that List For the sake of argument though let's Suppose that coinbase clinched a victory To do this it would have to prove that Hundreds if not thousands of Cryptocurrencies are not Securities and Also that its staking service is not the Security either If coinbase can pull this off it would Be unbelievably bullish for crypto That's because all these hundreds or Even thousands of cryptocurrencies would Technically be safe from SEC scrutiny Along with any staking Services being Provided by Third parties This would also allow crypto exchanges

In the US to not only continue operating But expand their operations and crypto Offerings Come to think of it a clean win for Coinbase means that crypto companies From around the world would set up shop In the United States in case you haven't Noticed the exact opposite is happening Now crypto companies and projects are Leaving the US and coinbase could be Next Now if life has taught me anything it's That the answer typically Falls Somewhere in the middle I suspect that coinbase has a pretty Solid defense up its sleeve and it could Be something as simple as the fair Notice defense used by Ripple after all Coinbase had been operating since 2012 Without SEC scrutiny heck the SEC Approved coinbase's application to list Its stock on regular exchanges clearly The company has been committed to Compliance since day one and this is Evident in the sec's own allegations now I'm not a lawyer but I believe that Intent is a part of the law and coinbase Had no intent to break Securities laws So in the event of this middle outcome Coinbase would be safe as would every Other crypto exchange that's been Operating for more than a few years Which is most of them even so they could Still be forced to de-list any

Cryptocurrencies the SEC considers to be Securities and scrap their staking Services in some then it's still too Seen to say how this cookie will crumble And it could be years before we find out What is for sure though is that the Crypto industry is going to fight like Hell to get the regulatory Clarity it Needs to operate in the United States All that's needed is for new crypto Legislation to pass through Congress Speaking of which it's important that You know which presidential candidates Are pro-crypton and you can check out Our analysis of the Front Runners using The link in the description And that's all for today's video folks If you found it helpful help me out by Smashing that like button subscribing to The channel and pinging that Notification Bell if you want some more Help you can check out the coin Bureau Deals page there are massive fee Discounts of up to 50 and bonuses of up To forty thousand dollars from some of The best exchanges link will of course Be down in the description thank you all For watching and I'll see you next time [Music]