Coinbase faces warnings from SEC over potential violations

Yahoo Finance’s David Hollerith joins the Live show to discuss the SEC’s warning to Coinbase.

Video transcript

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- Coinbase is in the hot seat after the SEC accused and issued the crypto exchange a notice, warning of potential violations of the US Securities law. Yahoo Finance's David Hollerith joins us now to answer the question, what do Soulja Boy, Lindsay Lohan, and Jake Paul all have in common, David?

DAVID HOLLERITH: Well, so, Brad, you're pointing out that yesterday Coinbase made this disclosure that the SEC had sent a Wells notice letter. And, obviously, this came within an hour or so of another action that the SEC had announced, which was against Justin Sun, the founder of the cryptocurrency or blockchain network and token Tron or TRX and related promoters who had been promoting the cryptocurrency. The SEC accused them of offering the sale of an unregistered security, also, the promoters for being part of that. And given the fact that they also pointed to watch trading conducted by TREX or the Tron Foundation for allegedly, you know, buying and selling or trying to stimulate volume for the cryptocurrency.

But this Wells notice from Coinbase, that Coinbase disclosed through a regulatory filing is kind of interesting in that it's a long time coming and there's a lot of context for this, given how many crypto cases we're looking at. The SEC has put down 11 enforcements against crypto firms and individuals since the beginning of 2023. But you know what's striking about this notice? Coinbase also put out a blog post. And its CEO Brian Armstrong also posted a tweet thread that showed that the company was fairly confident about its position.

Now, in the Wells notice, it's not exactly clear what the SEC is going after. But Coinbase said it believes any action. The SEC might take after following this Wells notice would be specifically related to the crypto assets they listed on their platform. And this would include aspects of the exchange's spot market staking service and wallet services.

So this would be like a probable injunctive relief, disgorgement, and civil penalties if the SEC were to put out an enforcement action. But Coinbase has been pretty adamant and clear that they would plan to fight any kind of enforcement action in court. The chief legal officer, echoing the CEO in this blog post, had said that Coinbase is confident of the legality of its assets and services and, if needed, would welcome a legal process to provide further clarity to the crypto industry. And, in his words, he said, the SEC simply has not been fair or reasonable when it comes to its engagement on crypto, on digital assets. So there's a lot going on there. But it sounds like Coinbase is pretty adamant about its position.

JULIE HYMAN: Another story you're following that also has implications for the broader crypto space, right-- I think that's why Coinbase's story is interesting. Not just because it has implications for Coinbase, but what's it going to mean for other crypto companies?

Similar situation with Ripple. It's been rallying this week. It has its own legal battle with the SEC. That's been going on for a long time and maybe is coming to a conclusion soon?

DAVID HOLLERITH: Yeah, Julie, there are a handful of lawsuits between the SEC and crypto firms. And the SEC in the US has been very actively trying to take more regulation over the crypto space. Ripple's ongoing case started in 2020, which sort of makes it the oldest of the cases we've been watching. And for years, the case's verdict has hinged on whether or not certain cryptocurrencies-- in this case, Ripple's related token, the XRP token-- would be classified as a security under the Howey Test. And the XRP token, as you pointed out, has rallied. And the thing that I would point out too, just looking at the court docket, has been Ripple has posted another court case, the Voyager Digital's bankruptcy, in which the judge ruled in favor of the sale of the customer assets to Binance US. This was after Binance US-- or this was after the SEC had objected to the sale, calling Binance US or alleging that Binance US was an unregistered securities exchange. In that case, the judge in his verdict said, essentially, that the SEC hadn't offered enough evidence to prove that this was true.

So this is kind of what's been happening in a lot of these cases, including Grayscale's, which it's filed against the SEC and is currently also happening is that the SEC has not been offering enough burden of proof as to whether or not these crypto assets are securities. And so we're going to be-- we're going to continue to watch this. But, I mean, I think the question here remains to be seen about which case is going to be the first to get a verdict and how much will that implicate the other ones? I mean, if Coinbase were to have a court case, this would obviously take up to years. Ripple, on the other hand, is set to conclude sometime this year, hopefully soon.

JULIE HYMAN: We'll find out. All right, thanks so much. Appreciate it, David.