THE SEC is Claiming Coinbase Offers Securities

The Securities and Exchange Commission has reportedly launched a new investigation into the Californa-based exchange Coinbase. According to Bloomberg, the probe is to determine whether the company allowed U.S citizens to purchase assets that should have been registered as securities.

This investigation most likely stems from last week's reported arrest of a former Coinbase employee who is accused of insider trading, as it was discovered he was giving his brother the list of tokens to be added to exchange.

At the time the SEC did not claim any misconduct on Coinbase's part. However, it did say they had through their investigation discovered nine assets that were traded by the accused which could be considered securities, as they have "hallmarks of the definition of a security.".

The SEC classifies a security when it applies the Howey Test, a standard that an asset must obtain for the commission to consider it a security and regulate it as such.

Through this process, the SEC categorizes an asset when it has individuals invest money within a corporation to fund its operations, which they then hope to make a profit from when the company becomes successful.

In the past, the SEC claimed to not consider Bitcoin or Ethereum security. Although the agency did weigh in on another asset in the industry, XRP when it issued them a $1.3 billion lawsuit in December of 2020.

Coinbase did not take these claims lightly as its chief legal officer Paul Grewal took to Twitter to defend his employer's honor stating “We are confident that our rigorous diligence process―a process the SEC has already reviewed―keeps securities off our platform, and we look forward to engaging with the SEC on the matter,”

Detailed in a blog post published last week the popular exchange wrote “this process includes an analysis of whether the asset could be considered to be a security, and also considers regulatory compliance and information security aspects of the asset.”

“Coinbase does not list securities on its platform. Period” added the blog post. Previously the company had filed a petition with the SEC to improve "rulemaking on digital asset securities."

Per the company, the “petition calls on the SEC to develop a workable regulatory framework for digital asset securities guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.”

The SEC may be digging into a hornet nest it is not prepared to handle as claiming these assets are securities would then require them to take individual suits on the companies who develop these tokens as well as every exchange offering them in the U.S.