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Crypto exchange Coinbase is arguing with the SEC over whether some tokens should be classified as securities.
Dreamstime
Coinbase
Global is clashing with the Securities and Exchange Commission over a question that could prove pivotal to the broader crypto industry: Are some tokens really securities?
The SEC on Thursday announced insider trading charges against a former
Coinbase
(ticker: COIN) product manager and two other people. The case hinges on a subtle but critical argument: Some cryptocurrencies listed on
Coinbase
are actually securities, according to the SEC. Coinbase does not agree.
“Coinbase does not list securities. End of story,” Paul Grewal, the company’s chief legal officer, said in a statement.
The question of whether tokens should be classified as currencies, commodities, or securities has loomed large over the industry. According to the SEC, some tokens most likely meet the definition of a security. Ripple—a payments network token—is a security, according to the SEC, though Ripple Labs and the regulator are locked in a legal battle over this distinction.
Bitcoin, on the other hand, is a commodity, SEC chair Gary Gensler has said. Bitcoin futures, meanwhile, are regulated by the Commodity Futures Trading Commission (CFTC).
The definitions are important, because if crypto tokens are not securities, then the SEC may not have much jurisdiction over exchanges like Coinbase, and it wouldn’t be able to regulate the listing and trading of tokens.
The regulator also may not have much of an insider-trading case.
The SEC, in its complaint in the case, alleges that a former Coinbase manager tipped off his brother and another person that some tokens would be listed on the exchange, enabling them to profit of the confidential information. According to the SEC, the scheme netted profits of more than $1.1 million. And at least nine of the tokens were securities, the SEC said.
“We are not concerned with labels, but rather the economic realities of an offering,” Gurbir Grewal, director of the SEC’s division of enforcement, said in a statement. “A number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase.”
Coinbase CEO Brian Armstrong said on Twitter that “we actively monitor for illegal activity and investigate any alleged misconduct.” The company launched an investigation in April after being tipped off about possible frontrunning, he said, providing the names of three individuals to law enforcement and terminating an employee.
It is also clear that Coinbase intends to dispute the SEC’s premise that some tokens on its platform are securities.
“We100% disagree with the SEC’s assertion that any of the crypto assets we list are securities,” said Paul Grewal, Coinbase’s chief legal officer, in a tweet on Thursday. “We remain confident that Coinbase’s rigorous review process keeps securities off Coinbase’s platform,” he added in a blog post.
The SEC’s insider-trading case also seem to be sowing discord with other regulators. CFTC Commissioner Caroline Pham said via Twitter that the SEC’s move was an example of “regulation by enforcement.” The SEC’s allegations “could have broad implications beyond this single case,” she added in a statement, calling on regulators to work more closely.
Coinbase, meanwhile, is trying to ramp up pressure on the SEC to establish rules for crypto. The company filed a petition on Thursday, requesting that the SEC “begin rulemaking on digital asset securities.”
The SEC did not respond to a request for comment.
Regardless of how tokens are ultimately classified, the industry is likely to face far more regulatory scrutiny and enforcement activity. The Department of Justice is getting more involved in pursuing crypto crime; the DOJ filed criminal charges in the Coinbase case, and it’s filed charges against a former employee of the NFT platform Opensea, also alleging insider trading.
The SEC aims to beef up its crypto enforcement, analysts at J.P. Morgan led by Steven Alexopoulos said in a report on Friday.
The SEC added 20 positions to its crypto asset and cyber unit in May, the analysts noted, bringing its total headcount to 20—with the regulator asking for additional resources to step up crypto regulation.
Write to Jack Denton at jack.denton@dowjones.com