Shares of Coinbase closed down more than 21% Tuesday on reports that it’s facing an SEC probe into whether the platform is offering unregistered securities.
Coinbase stock has lost more than 75% of its value this year.
The U.S. Securities and Exchange Commission is scrutinizing whether the company illegitimately let users trade digital assets that haven’t been registered as securities, CNBC has confirmed with a source. The news was earlier reported by Bloomberg.
“I’m happy to say it again and again: we are confident that our rigorous diligence process — a process the SEC has already reviewed — keeps securities off our platform,” said Coinbase’s chief legal officer Paul Grewal on Twitter. “We look forward to engaging with the SEC on the matter.”
This SEC probe reportedly happened before and was separate from Coinbase’s alleged insider trading scheme that led to the fraud charges against an ex-Coinbase product manager and two other people Thursday. But SEC also filed a complaint the same day, claiming that nine of the 25 tokens allegedly traded in the scheme were securities.
The argument over how to classify cryptocurrency tokens is controversial. Generally speaking, if cryptocurrencies are commodities (like other kinds of currency), they would be governed by the Commodity Futures Trading Commission. But many crypto projects are funded by the sale of tokens whose primary value is speculative. SEC Chair Gary Gensler has said that “many of these underlying tokens have the attributes of securities” and need to be regulated as such to protect investors.
In the agency’s recent lawsuit against the alleged insider trading scheme, the SEC wrote, “A digital token or crypto asset is a crypto asset security if it meets the definition of a security, which the Securities Act defines to include ‘investment contract,’ i.e., if it constitutes an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
Other crypto firms, such as San Francisco-based Ripple, are also fighting lawsuits from SEC.
Compared to Binance and FTX, Coinbase is more selective with its token listings. Coinbase lists over 200 such tokens, according to CoinGecko data.