Crypto exchange Coinbase is reportedly facing an SEC investigation over securities

Illustration by Alex Castro / The Verge

According to a report, the US Securities and Exchange Commission is looking into whether or not the exchange allowed users to trade securities that weren't registered. The investigation hasn't been made public.

According to sources close to the situation, the SEC began taking a closer look at the practices of the exchange after it added more than 100 additional token to its platform. After they are first listed, these types of coins do well, but they are very volatile and their value tends to evaporate over time.

The investigation is unrelated to the case against the former product manager and his friends. Ishan tipped the timing and content of upcoming listing announcements, which resulted in gains of over $1 million for his brother and friend, according to the charges. At least nine of the nine securities were purchased by the two people.

I’m happy to say it again and again: we are confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform, and we look forward to engaging with the SEC on the matter. A refresher: https://t.co/SaacvrZEiU

— paulgrewal.eth (@iampaulgrewal) July 26, 2022

According to Paul Grewal, the chief legal officer at Coinbase, the Department of Justice didn't file security fraud charges against the company when they indicted three people. The assets referred to in the charges are not securities according to Grewal.

The SEC reviews the process of analyzing and reviewing digital assets before they are made available on the exchange. An analysis of whether the asset could be considered to be a security is included in the process.

Securities that hold monetary value must be registered with the SEC. Not all digital assets are securities. Digital assets and token used in initial coin offerings are securities according to the former SEC chairman.

This sounds like it is confusing. The US lacks a clear and workable regulatory regime, according to a petition filed last week. The SEC takes anenforcement-first approach rather than establishing a set of rules for companies to abide by.

The SEC has already reviewed our process and we look forward to engaging with them on the matter.