The U.S. Securities and Exchange Commission (SEC) has charged crypto exchange Coinbase with operating its trading platform as an unregistered securities exchange, broker, and clearing house.

The complaint, which was filed in the U.S. District Court for the Southern District of New York, alleged that the exchange violated certain provisions of the Securities Exchange Act. The agency alleged that the publicly traded exchange has “made billions of dollars from unlawfully facilitating the buying and selling of crypto asset securities.”

The action toward Coinbase comes just one day after the regulator filed 13 charges against crypto exchange Binance, its U.S. counterpart, Binance.US, and its CEO Changpeng Zhao.

Coinbase successfully entered the U.S. public markets with an IPO in April 2021. The regulator now alleges that since 2019 the company has intertwined “the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the commission as required by law.” By failing to register these services, the agency alleged that investors have been deprived of significant protections.

The regulator also took issue with Coinbase’s staking-as-a-service platform, which it said should have been registered with the commission as required by securities laws. Staking is the process of locking away crypto assets for a set period of time to help validate the network and receive rewards in return.

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” said Gurbir Grewal, director of the SEC’s division of enforcement, in a press release.

“While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled,” Grewal added. “Today’s action seeks to hold Coinbase accountable for its choices.”

Coinbase has been outspoken about the lack of clarity from the SEC. It filed a petition with the regulator requesting that it propose and adopt rules specific to the regulation of the digital asset sector. The exchange then sued the agency in April in the hopes of forcing the agency to provide a yes or no response to this petition.

Unregistered Securities

Coinbase also faced legal scrutiny last year when the SEC and federal prosecutors charged Ishan Wahi, a former Coinbase employee with insider trading. In the case, the SEC alleged that nine of the tokens Coinbase had listed were securities, which opened the exchange up to legal risk. In today’s filing by the SEC, it lists 13 tokens as securities including Solana (SOL), Cardano (ADA) and Polygon (MATIC) among others.

Some of these tokens were also listed in the filing against Binance. However, the SEC said in both cases that the list was not exhaustive. Notably, bitcoin and ether are not mentioned as securities in either.

Coinbase only lists assets that it considers as commodities based on its own self-developed legal analysis of assets, said Coinbase’s CEO Brian Armstrong in a blog post last year. This was developed due to a lack of clarity from regulators, he added.

“Coinbase has for years touted its efforts to analyze crypto assets under the standards set forth in Howey before making them available for trading,” said the SEC in the filing.”But while paying lip service to its desire to comply with applicable laws, Coinbase has for years made available for trading crypto assets that are investment contracts under the Howey test and well-established principles of the federal securities laws.”

Coinbase’s stock (COIN) plummeted  around 13% following the news. Alt-coins such as Polygon (MATIC) and Solana (SOL) are down 9% and 8%, respectively, over the past 24 hours. 

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” said Paul Grewal, Coinbase’s chief legal officer and general counsel, in an email. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”  

Paul Grewal is expected to testify on Capitol Hill before the House Committee on Agriculture on Tuesday regarding a draft market structure bill proposed by key House Republicans. In his testimony for the hearing, he urges regulators on the need for clear crypto rules.