Crypto will be 'over' in the U.S. if Coinbase loses battle with SEC, this industry participant says. Here's why

By Frances Yue

Hello! Welcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.

Crypto exchange Coinbase (COIN) said Wednesday that it received a Wells notice from the Securities and Exchange Commission, which could lead to formal charges.

The SEC's Wells notice was regarding an unspecified portion of the exchange's listed digital assets, its staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet, Paul Grewal, Coinbase's chief legal officer wrote in a blog post.

Coinbase will continue to offer its products and services as usual, Grewal said.

While it is not the first time the SEC issued a Wells notice, or brought up charges against a crypto company, the move is particularly important, as Coinbase is the largest crypto exchange in the U.S. and arguably the most regulated, industry participants said.

Still, bitcoin prices look to be holding up well. The crypto is trading above $28,000 Thursday after slipping Wednesday, as the Federal Reserve raised its key interest rate by a quarter of a percentage point, as widely expected, while the Fed chairman Jerome Powell said it's "the most likely case" that the central bank would refrain from cutting its key interest rate this year.

Again, find me on Twitter at @FrancesYue_ to share any thoughts on crypto, this newsletter, or your personal stories with digital assets.

Coinbase receives Wells notice

The SEC staff told Coinbase they have identified potential violations of securities laws, but didn't provide much details, according to Grewal.

A representative at the SEC declined to comment.

The vast majority of cryptocurrencies in circulation are securities that should be overseen by the SEC, the agency's chairman Gary Gensler previously said.

While specifics around the SEC's notice remain unclear, the agency's move could hurt institutional interest in the already battered crypto industry, according to Kavita Gupta, founder and general partner of Delta Blockchain Fund.

Still, if the SEC ends up bringing up enforcement actions against Coinbase and the exchange chooses litigation, it might push for more clarity in crypto regulation, said Alex Thorn, head of research at Galaxy Digital. "The SEC will have to make strong cases for them in court," Thorn said. Digital asset companies have long complained that the SEC didn't provide enough clarity on crypto regulation and demanded new sets of rules for the fledgling industry, while the regulators said digital assets are subject to existing laws.

However, lawsuits may take years to conclude and the ruling doesn't always guarantee any clarity in regulation, although the judge would usually rule in favor of one party. "A ruling can be made that is so narrow that it doesn't actually provide the clarity," said Thorn.

If Coinbase loses its battle with the SEC, "it means that the crypto industry is over in the U.S.," Delta's Gupta said.

U.S. regulators have been doubling down their efforts to increase oversight of the crypto industry, after several major companies collapsed last year, resulting in billions of investor losses.

In February, the SEC charged Kraken for failing to register its staking program. The exchange ended the program in the U.S. and paid $30 million in penalties to settle the charges, without admitting or denying the allegations.

Meanwhile, the New York Department of Financial Services ordered stablecoin issuer Paxos to stop minting BUSD, a stablecoin issued by Paxos and branded by the world's largest crypto exchange Binance. Paxos also received a Wells notice from the SEC, who is considering recommending an action alleging that Paxos failed to register BUSD, as a security.

SEC charges Justin Sun

The SEC on Wednesday charged Justin Sun, founder of blockchain Tron, alleging that he sold unregistered crypto securities and fraudulently manipulated the secondary market for Tronix, the blockchain's native token.

The agency also charged eight celebrities, including actress Lindsay Lohan, social media personality Jake Paul, porn star Kendra Lust, and musicians Lil Yachty, Austin Mahone, Soulja Boy, Ne-Yo and Akon, for touting Tronix and another token BitTorrent, without disclosing that they were compensated for it and the amount of their compensation, according to a statement Wednesday.

With the exception of Soulja Boy and Mahone, the six other celebrities settled with the SEC, agreeing to pay a total of $400,000 in disgorgement, interest and penalties, without admitting or denying the regulator's findings.

MarketWatch's Chris Matthews wrote more about it here.

Do Kwon's arrest

A man who's believed to be Do Kwon, founder of Terraform Labs, which was linked to a over $40 billion crypto implosion last year, was arrested in Montenegro, according to the country's Minister of Interior, Filip Adzec.

Kwon was detained in the Podgorica airport with falsified documents, and is wanted by authorities in South Korea, the US and Singapore, Adzec tweeted Thursday. "We are waiting for official confirmation of identity," he wrote.

The alleged arrest happened a bit over a month after the SEC charged Terraform and Kwon with orchestrating a multi-billion dollar crypto asset securities fraud. Last year, blockchain Terra's stablecoin TerraUSD and its sister crypto Luna collapsed, wiping out over $40 billion in market value and starting a chain reaction that tore through the crypto industry.

MarketWatch's Anushree Dave wrote more here.

Crypto in a snap

Bitcoin rallied over 11% in the past week and was trading at around $28,670 on Thursday, according to CoinDesk data. Ether gained 5% in the same period to around $1,843.

Biggest Gainers  Price  %7-day return 
Mask Network     $5.83  51% 
Conflux          $0.39  40% 
Stacks           $1.21  37% 
Fantom           $0.50  28.5% 
XRP              $0.46  25.5% 
                        Source: CoinGecko 
Biggest Decliners  Price       %7-day return 
Toncoin            $2.23       -11% 
Maker              $692.60     -7.9% 
Huobi              $3.71       -6.8% 
BitTorrent         $0.0000006  -4.1% 
Cosmos Hub         $11.97      -4.1% 
                               Source: CoinGecko 

Crypto companies, funds

Shares of Coinbase Global Inc. (COIN) went down 12% for the week to around $65.78. MicroStrategy Inc. (MSTR) slipped 4% thus far on the week, to $256.70.

Crypto mining company Riot Blockchain Inc. (RIOT) went up 14.2%, to $9.25 as of Thursday. Shares of rival Marathon Digital Holdings Inc. (MARA) edged up 0.8% to $8.22 over the past week. Ebang International Holdings Inc. (EBON) traded 1.3% higher over the past week to around $6.80.

Overstock.com Inc. shares (OSTK) edged up 1% to $19.60 over the week.

Shares of Block Inc. (SQ), formerly known as Square, tanked 17% to $61.16 for the week thus far. Tesla Inc. (TSLA) shares rose 6.2% to $191.20.

PayPal Holdings Inc.'s (PYPL) stock slid 1.1% over the week to trade at around $72.20. Nvidia Corp.'s (NVDA) went up 4.8% to $269.60 for the past week.

Advanced Micro Devices Inc. (AMD) shares went up 1.9% to $99.75 for the week.

Among crypto funds, ProShares Bitcoin Strategy (BITO) rallied 4.6% over the week to $17.20 Thursday, while counterpart Short Bitcoin Strategy ETF (BITI) retreated 5.1% to $21.26. Valkyrie Bitcoin Strategy ETF (BTF) gained 4.8% over the past week to $11.00, while VanEck Bitcoin Strategy ETF (XBTF) advanced 2.6% to $27.52.

Grayscale Bitcoin Trust (GBTC) rose 7.2% over the past five days to $15.83 on Thursday.

-Frances Yue

Must-reads

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

03-23-23 1536ET

Copyright (c) 2023 Dow Jones & Company, Inc.