Shares of Coinbase fell significantly ahead of Tuesday’s opening bell on Wall Street as investors evaluated the potential implications of a legal dispute between the leading American cryptocurrency exchange and the Securities and Exchange Commission (SEC).
Coinbase’s stock price dropped by over 18% to $48.53 in pre-market trading, furthering losses that it had already experienced following the SEC’s lawsuit against rival exchange Binance and CEO Changpeng Zhao the previous day.
The U.S. Securities and Exchange Commission alleged that the cryptocurrency platform violated securities laws by operating as an unregistered exchange, broker, and clearing agency. These allegations are similar to those raised against Binance earlier this week. Nevertheless, Coinbase was not accused of blending the funds of its customers.
The SEC also considered the staking products offered by the exchange — which allow customers to earn rewards by locking up tokens like ETH — to be unregistered securities offerings. This is following a warning given to Coinbase by the agency in March, which stated that these staking services violate securities regulations.
Enforcement actions taken by the SEC on two major crypto exchanges are a part of the regulator’s campaign against digital assets. The agency ramped up its enforcement efforts after last year’s collapse of a major cryptocurrency exchange FTX. US-based exchange Kraken has also been targeted by the regulator this year for similar violations.
Two years ago, Coinbase became a public company that necessitates registration with the SEC. However, the Commission alleges that the firm has been conducting business as an unregistered financial services entity since 2019, prior to its listing as the first publicly traded crypto exchange.
Coinbase has asserted that the SEC might face reputational damage if it takes legal action against the firm after the approval of the exchanges’ filing for a public offering in 2021.
The SEC’s lawsuits against Binance and Coinbase are quite similar, as they both label various tokens trading on the platforms, like SOL and MATIC, as securities. However, Coinbase CEO Brian Armstrong is not listed as a defendant in the latter suit.
As trading activity on the exchange declined following the pandemic-fueled spike, Coinbase introduced staking products to reduce its dependency on trading fees. However, the SEC’s lawsuit could have an impact on how effective or profitable the switch will be.
Coinbase’s stock price soared when cryptocurrency prices reached their heights in late 2021. However, its shares have since dropped 86% from the peak value of $357.39, which was hit in November of 2021.