The lawsuit brought by the United States Securities and Exchange Commission against Coinbase Global on June 6 is raising questions about the crypto exchange’s approach to managing the ongoing crypto crackdown.
In a recent interview with Pandoraland, venture capitalist Kevin O’Leary criticized Coinbase’s strategy to address the current regulatory environment. “Its market cap was decimated [by the SEC suit], and the management there seems to want to keep taking on the SEC over and over and over again,” said the serial entrepreneur in reference to the 17.4% drop in Coinbase’s stock last week. O’Leary continued:
“I would think at this point, if you’re a shareholder in that company, you may want to make some changes. I don’t think this is working as a strategy. […] I am not optimistic for the management team there. […] I think investors are done with this.”
Coinbase has spent months campaigning for clearer crypto regulations in the U.S. amid increasing regulatory scrutiny. In a recent interview with The Wall Street Journal, Coinbase CEO Brian Armstrong said the exchange met with the SEC over 30 times in the past year without receiving any feedback on a path to compliance.
Mark Kornfeld, a securities and regulatory attorney, told Pandoraland that stock prices dropping due to regulatory activity, such as the SEC’s proceedings against Coinbase, are often used as a template for private claims of alleged damages, as long as they carry materiality of misleading statements or omissions. “The devil, as always, is in the details as to whether what is alleged is proven to have occurred,” Kornfeld noted.
According to corporate and securities lawyer Roland Chase, legal claims from harmed investors against Coinbase and its management could range from “whether the legal analysis that Coinbase conducts every time it considers a crypto asset for listing is adequate” to whether its risk factor disclosure to investors was adequate.
“If it [token’s listing analysis] is not adequate, and management knew that — or was reckless in not knowing it — there may be a federal securities law claim against Coinbase and its management,” Chase continued.
Coinbase claims to have reviewed over a thousand assets, with 90% being rejected. “We thought some of them could be securities or we had other concerns about them. We really only list a very conservative small number of the assets out there,” Armstrong told WSJ.
Regarding its disclosure to investors, Coinbase’s filing with regulators in 2021 seemed to predict what it was likely to encounter in the future. The risks section of the filing reads:
“A particular crypto asset’s status as a ‘security’ in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition.”
A legal dispute with regulators could take years in court and cost the exchange a significant amount money. Ripple, which is currently in litigation over XRP’s (XRP) alleged security status, has spent over $200 million defending against the SEC lawsuit since 2020.
Pandoraland reached out to Coinbase but did not receive a response.