The U.S. turned up the heat on the crypto industry on Wednesday, as regulators sued Tron founder Justin Sun and several of his celebrity promoters, and threatened to do the same to Coinbase (NASDAQ:COIN).
In moves that bring to a head the long-running dispute over crypto exchanges’ business models, the Securities and Exchanges Commission formally charged Sun with illegally distributing tokens such as Tronix and BitTorrent, and of manipulating the market in them to give the appearance of stability and liquidity.
The SEC also charged a handful of celebrities paid by Sun to promote the assets on social media, including actress Lindsey Lohan and rapper Soulja Boy. Soulja Boy was one of only two celebrities not to settle the charges.
In addition, the SEC sent a so-called Wells notice to Coinbase, the largest remaining U.S.-based crypto exchange, indicating that it intends to begin an enforcement action against it, too, on the basis of having illegally distributed unregistered securities.
Coinbase stock, which has already lost 70% since going public in 2021, fell another 10% in after-hours trading. Bitcoin and other digital assets were more robust, losing no more than 3%. That was largely due to support from crypto enthusiasts betting on the collapse of the mainstream financial system as the Federal Reserve raised interest rates again on Wednesday.
“Based on discussions with the Staff, 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 filing.
Staking services in particular, with their frequently high yields and their reliance on the efforts of others rather than investors to generate value, have been in the cross-hairs of the SEC for years, but scrutiny has increased markedly in the months since the collapse of FTX. Rival exchange Kraken closed its staking service in February and agreed to pay $30 million for failing to register it with the SEC.
Coinbase management wasn’t fazed by the development, however.
“While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court,” Coinbase CEO Brian Armstrong said via Twitter.
Coinbase and others in the space have been able for over a decade to exploit a turf war between the SEC and the Commodity Futures Trading Commission over who has authority to regulate them. While the CFTC sees crypto assets as commodities, the SEC views them as securities, a view that has gained traction as staking services have increased in popularity.
A Wells notice does not always lead to charges or signal that the recipient has broken the law.