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SEC Launches Coinbase Probe

Plus500 | Tuesday 26 July 2022

One of the Cryptocurrency sector’s largest platforms is shrouded in controversy at the moment. It was reported yesterday that the United States’ Securities and Exchange Commission (SEC) is investigating Coinbase (COIN) for trading improprieties. While the proximate consequences of this inquiry are as yet unknown, it’s worth taking a look at what we know so far so as to ascertain the root of the issue.

Coinbase

Coinbase Under SEC Probe

Anonymous sources recently revealed to reporters at Bloomberg that the SEC is investigating whether American users of the country’s largest Crypto exchange have been permitted to trade falsely classified assets. Apparently, there is a possibility that some of the assets available for trading on Coinbase should have been classified as securities according to U.S. regulatory law. While digital coins are currently legally considered Commodities, some argue that they should be re-classified due to the investment and expectation of profit that some attribute to the Crypto sector. (Source:Reuters)

With the digital assets traded by U.S. citizens on Coinbase already reaching into the triple digits, an imposed reclassification by the Securities and Exchange Commission could necessitate a sea change in the platform’s business strategy. Were this to come to pass, Coinbase would need to register as a securities exchange with the SEC. However, the platform’s executives have taken to the internet to deny the allegations and insist that securities are not offered on Coinbase.

Trading From the Inside

This isn’t the platform’s first run-in with the regulators at the SEC. Last week, the commission filed charges against a former Coinbase manager, Ishan Wahi, in the first-ever case of Cryptocurrency insider trading. According to the charges, an investigation launched in April revealed that this erstwhile member of Coinbase’s investment management team illegally provided information regarding new digital tokens to two accomplices. 

They were then able to purchase these assets before their listing on Coinbase increased the surrounding buzz, affording them a purportedly unfair advantage. In addition to the SEC’s insider trading charges, state prosecutors in New York have charged Wahi and his two alleged accomplices with wire fraud. (Source:Bloomberg)

Crypto Under a Microscope?

These two issues facing Coinbase tie into the increased scrutiny the Cryptocurrency sector as a whole has been coming under in recent times. While this asset class may be a relative newcomer to the U.S. market when compared to Stocks or Commodities, the volatility associated with Crypto has led legislators in Washington, D.C., to call for more regulation.

Crypto, like many other sectors of the American economy, has been struggling so far this year. Bitcoin (BTCUSD) has dropped 54% so far in 2022, while Ethereum (ETHUSD) has shown a 61% loss. With such steep declines observed, along with the fact that trading behaviour on the Crypto market is still a source of some controversy among experts, the U.S. government may move to turn up the heat on Coinbase and other firms in the sector.

Thus far, whether regulatory woes will lead to Coinbase changing its business model is still unknown. While Coinbase shares have dropped by over 73% since the beginning of 2022 in tandem with much of the Crypto sector, traders will have to wait and see whether a recovery is in the cards.


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