Coinbase warned by SEC of potential securities charges

The Securities and Exchange Commission issued crypto exchange Coinbase a Wells notice, warning the company that it identified potential violations of U.S. securities law.

Coinbase shares fell nearly 12% in extended trading after the news broke on Wednesday, adding to an 8.16% drop during regular traidng hours.

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

The SEC has ramped up its enforcement of the crypto industry, bearing down on companies and projects that the regulator alleges were hawking unregistered securities. Reports first surfaced of an SEC probe into Coinbase in mid-2022.

Months before the collapse of FTX in November, crypto markets were roiled by rising interest rates and a broad move out of risk, which contributed to the collapse of stablecoin Terra and the demise of crypto hedge fund Three Arrows Capital and exchanges Celsius and Voyager.

A Wells notice is typically one of the final steps before the SEC formally issues charges. It generally lays out the framework of the regulatory argument and offers the potentially accused an opportunity to rebut the SEC’s claims.

Coinbase described the investigation as “cursory,” and said the Wells notice provided relatively little information about potential violations.

“Although we don’t take this development lightly, we are very confident in the way we run our business – the same business we presented to the SEC in order for us to become a public company in 2021,” Coinbase Chief Legal Officer Paul Grewal said in a blog post.

The company said that until the resolution of any legal processes, the exchange’s offerings would continue to operate as usual.

Coinbase executives, including founder and CEO Brian Armstrong, have pushed back against perceived overreach by the SEC, which has moved aggressively against the crypto industry since the collapse of FTX. At the direction of SEC chair Gary Gensler, the regulator has issued enforcement actions against multiple heavyweights, including Gemini, Genesis, TRON executive Justin Sun, Do Kwon, and crypto exchange Kraken.

“We are prepared for this disappointing outcome and confident in the legality of our assets and services,” Grewal said in a statement. “If needed, 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.”

The SEC sent a Wells notice to stablecoin issuer Paxos in February. “We will engage with the SEC staff on this issue and are prepared to vigorously litigate if necessary,” a Paxos spokesperson told CNBC at the time.

Grewal said Coinbase is looking for more regulatory clarity.

“Tell us the rules and we will follow them,” he said. “Give us an actual path to register, and we will register the parts of our business that need registering.”

WATCH: Important to have regulatory clarity in U.S. crypto markets, says blockchain data firm