By Jonathan Stempel

NEW YORK (Reuters) – The U.S. Securities and Exchange Commission on Tuesday sued Coinbase, accusing the largest U.S. cryptocurrency platform of operating illegally because it failed to register as an exchange, in another blow to the crypto industry.

The lawsuit is the SEC’s second in two days against a major crypto exchange, following its case against Binance, the world’s largest cryptocurrency exchange, and founder Changpeng Zhao.

Both civil cases are part of SEC Chair Gary Gensler’s push to assert jurisdiction over the crypto industry, which he on Tuesday again labeled a “Wild West” that has undermined investor trust in the U.S. capital markets.

“The whole business model is built on a noncompliance with the U.S. securities laws and we’re asking them to come into compliance,” Gensler told CNBC.

Crypto companies say the SEC rules are unclear, and that the agency is overreaching by trying to regulate them.

Coinbase suffered about $1.28 billion of net customer outflows following the lawsuit, according to initial estimates from data firm Nansen.

Paul Grewal, Coinbase’s general counsel, in a statement said the company will continue operating as usual and has “demonstrated commitment to compliance.”

Ten U.S. states led by California also on Tuesday accused Coinbase of securities law violations concerning its staking rewards program.

Shares of Coinbase’s parent Coinbase Global Inc closed down $7.10, or 12.1%, at $51.61 after earlier falling as much as 20.9%. They are up 46% this year.

‘CAN’T IGNORE THE RULES’

In its complaint filed in Manhattan federal court, the SEC said Coinbase has since at least 2019 made billions of dollars by operating as a middleman on crypto transactions, while evading disclosure requirements meant to protect investors.

The SEC said Coinbase traded at least 13 crypto assets that are securities that should have been registered, including tokens such as Solana, Cardano and Polygon.

Founded in 2012, Coinbase recently served more than 108 million customers, and ended March with $130 billion of customer crypto assets and funds on its balance sheet. Transactions generated 75% of its $3.15 billion of net revenue last year.

In the staking rewards program, which has about 3.5 million customers, Coinbase pools crypto assets and uses them to support activity on the blockchain network, in exchange for “rewards” it provides customers after taking a commission for itself.

The SEC lawsuit seeks civil fines, the recouping of ill-gotten gains and injunctive relief. The SEC had warned Coinbase in March that charges might be coming.

“You simply can’t ignore the rules because you don’t like them,” SEC Enforcement Chief Gurbir Grewal, who is not related to Paul Grewal, said in a statement.

States probing the staking rewards program also include Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. New Jersey fined Coinbase $5 million for selling unregistered securities.

Coinbase said it expects to have “productive conversations” with the states and is confident its staking services are not securities.

OPPOSITION TO SEC CRACKDOWN

Gensler’s crypto crackdown has prompted the industry to boost compliance, shelve products and expand outside the country.

Kristin Smith, CEO of the Blockchain Association trade group, rejected Gensler’s efforts to oversee the industry.

“We’re confident the courts will prove Chair Gensler wrong in due time,” she said.

On Monday, the SEC accused Binance of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy U.S. customers off its platform, and misleading customers about its controls.

Binance pledged to vigorously defend itself against the lawsuit, which it said reflected the SEC’s “misguided and conscious refusal” to provide clarity to the crypto industry.

Customers pulled around $790 million from Binance and its U.S. affiliate following the lawsuit, Nansen said.

On Tuesday, the SEC filed a motion for a U.S. asset freeze in the Binance case.

Coinbase’s friction with Gensler dates to 2021, when the SEC threatened to sue if Coinbase were to let users earn interest by lending digital assets. The company scrapped the idea.

Tuesday’s case is SEC v Coinbase Inc et al, U.S. District Court, Southern District of New York, No. 23-04738.

(Reporting by Jonathan Stempel in New York; Additional reporting by Hannah Lang and Michelle Price in Washington, D.C., and Manya Saini in Bengaluru; editing by Jason Neely, Louise Heavens, Chizu Nomiyama and Nick Zieminski)

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