Coinbase, Binance sued: What is the SEC alleging?

The Securities Exchange Commission has sued Coinbase, alleging the firm broke securities law. Yahoo Finance legal reporter Alexis Keenan explains the SEC's suit and markets reporter Jared Blikre breaks down the market reaction.

Video Transcript

AKIKO FUJITA: Yeah. Let's get to our top story of the day, though. The Securities and Exchange Commission ramping up its crackdown on crypto, just one day after filing a lawsuit against Binance. The SEC is now targeting Coinbase.

We've got team coverage on this. Alexis Keenan is with the details on the charges and Jared Blikre is keeping track of the market reaction. Alexis, we want to start with you. Lay out the SEC's case against Coinbase for us.

ALEXIS KEENAN: Sure, Akiko. So let's just first say these two suits, they target these major crypto platforms that have been in this long dispute with the SEC over its regulatory authority, over both the exchanges as well as cryptocurrencies in general. Now the SEC says that both companies are violating US securities' laws by failing to register with the agency. As for Coinbase, the agency says that the company is also illegally merging market functions that are normally kept distinct from each other.

They say it's acting as a broker, an exchange, a clearing agency, and also a seller of securities. They say, as a result, Coinbase is then evading disclosure laws that were specifically set up to protect consumers by Congress. Now as for the case against Binance, it's similar, but it's a 14-count complaint compared to the SEC's five-count complaint against Coinbase.

In the Binance case, the SEC names both the company and the CEO Changpeng Zhao. It's a 14-count complaint, saying that the company illegally co-mingled customer assets also and misled customers as to the company's ability to detect market manipulation. They also said that the company was allowing US customers to trade on exchanges that were off-limits to US traders.

As for Coinbase, it's already been talking a lot about this case. Its CEO, Brian Armstrong, said the suit might help get some clarity around crypto rules. In an email separately to Yahoo Finance, its general counsel accused the SEC of relying on an enforcement-only technique, saying, (READING) "The solution is legislation that allows fair rules of the road to be developed transparently and applied equally," and "not litigation."

They don't like this route, but Brian Armstrong there seeming to say that perhaps, if it's got to be litigation, that maybe there's some rules that will come out of it or some distinctions that these companies can follow. But, look, guys, this is the 14th case that the SEC has brought against crypto entities since January. So they are definitely on the offensive here.

SEANA SMITH: They certainly are on the offensive right now. All right, Alexis, thanks so much. Let's take a look at how we are seeing the response play out in the market because Coinbase under a bit of pressure here, Jared. But when you take a look at Bitcoin, it's actually holding up pretty well.

JARED BLIKRE: Well, yes, up, up, and away here. Let me just show you what's happening today. This is over the rolling 24-hour period, up 4 and 1/2%.

It looks like 25,000, which is actually a little bit below here, was a floor. That's a big historical area for Bitcoin, but we can see it has not yet reclaimed yesterday's high. And so this is factoring also the news we got yesterday from Binance.

Now, overall, these are two of the biggest players in crypto. So you might be asking why did not Bitcoin suffer a little bit more because that would be the natural inclination. But I just want to show you a three-year timeline of Bitcoin and the various prices. I've got some SEC news in here, some Coinbase news. I'm just going to go over a couple.

But, first, Ripple was in the SEC spotlight in December of 2020, so this goes back a long time. Here's where Coinbase listed on the NASDAQ in early 2022. And then here is actually where they got their first little hiccup. (READING) "Coinbase drops plan to launch crypto lending program."

Well, they were in discussions with the SEC for a long time. They wanted to offer interest to their customers on their accounts the way, well, you could do that around the world but not necessarily in the US. They dropped that program. But what was later revealed was that Coinbase actually got a subpoena or multiple subpoenas for their efforts.

You go to the SEC palms up, and you're asking for help, guess what. You get a subpoena in return. This is not new enforcement procedures or new procedures for the SEC. This came out about a year later. And of course, by that time, we'd already seen the downfall of crypto.

FTX was in the crosshairs. Lots of things were happening, but I want to point to something else. Coinbase got a Wells Notice, and that was in March of 2022 actually, and so that was actually the first signal. That should be 2023, by the way.

That was the first signal that there was going to be some kind of probe by the SEC on the other side. So this is just kind of confirmation what a lot of investors were already thinking. But my bottom line here is if the SEC doesn't completely shut down Binance and Coinbase, probably not going to derail crypto. But if, in fact, the Coinbase business model cannot survive with SEC regulation, and that would probably take a long time to play out, well, that's a different story altogether.

AKIKO FUJITA: Yeah, as Alexis said, no question that the SEC is on the offensive right now. Jared Blikre, thanks so much.