The U.S. increased pressure on the crypto industry this week. Regulators sued Tron founder Justin Sun and several of his prominent supporters. Moreover, the warned crypto exchange Coinbase that it might take enforcement actions.
The U.S. Securities and Exchanges Commission (SEC) has formally accused Sun of illegally distributing tokens like Tronix and BitTorrent and manipulating the market to create the appearance of stability and liquidity.
A handful of celebrities who were paid by Sun to promote the two tokens on social media were also charged by the SEC, including actress Lindsey Lohan and rapper Soulja Boy.
In addition, the SEC sent a so-called Wells Notice to the largest remaining crypto exchange in the U.S., Coinbase. The letter indicates that the SEC wants to recommend steps against the company. The background is said to be the illegal distribution of unregistered securities.
Coinbase shares, which have already lost 70% of their value since going public in 2021, fell another 10% in pre-market trading. Bitcoin and other digital currencies presented themselves much more robust, with a minus of less than 3%. The backdrop is betted by the crypto community that the conventional financial system will soon implode after the Federal Reserve raised interest rates again on Wednesday.
“Based on conversations with employees, the company believes these potential enforcement actions would relate to aspects of the company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a statement.
Staking services, in particular, with their often high returns and reliance on the efforts of others rather than investors to generate value, have been in the SEC’s crosshairs for years. Still, it was only in the months following the collapse of crypto exchange FTX that regulatory interest in them increased significantly. Rival marketplace Kraken shut down its staking service back in February. After failing to file the service with the SEC, it agreed to a $30 million settlement.
Coinbase’s management, however, was not bothered by the recent developments.
“While we understand that this is all part of the journey to reform our financial system, we nevertheless abide by the law, are confident in the facts, and welcome the opportunity for Coinbase (and, by extension, the broader crypto community) to appear in court,” Coinbase CEO Brian Armstrong said via Twitter.
Coinbase and other players in the crypto space have been able to exploit a jurisdictional dispute between the SEC and the Commodity Futures Trading Commission (CFTC) over who is ultimately responsible for regulating them for over a decade. While the CFTC views crypto assets as commodities, the SEC views them as securities. The latter has gained steam with the growing popularity of staking services.
A Wells Notice does not always lead to charges or mean the recipient has violated the law.