The US Securities and Exchange Commission (SEC) recently made claims that crypto exchange Coinbase is offering unregistered securities to its clients after it filed an insider trading case against one of the former employees of the company.

The lawsuit

On Thursday, the securities regulator filed a lawsuit against an ex-product manager of Coinbase Global, along with two other individuals, for wire fraud because of an insider trading scheme that involves crypto tokens listed on the crypto exchange. It should be noted that this is the first insider trading scheme lawsuit involving cryptocurrencies to be filed.

According to the US prosecutors, the individuals involved in the case had planned to make profits from the listing of tokens on the Coinbase exchange before the announcements were made public. On the same day, the SEC filed another complaint in which it asserted that 9 of the total 25 tokens that were used for profits in the scheme were actually unregistered securities.

Coinbase responds

Paul Grewal, the chief legal officer of Coinbase, published a blog post on the same day, in which the claims were denied. He said that the exchange does not list any securities. He said that of the nine tokens that were listed in the charges of the SEC were available on the Coinbase platform, but none of these are securities.

He further added that the crypto exchange has a rigorous process in place for analyzing and reviewing every digital asset before it is listed. He asserted that the SEC itself has reviewed this process and knows what is involved.

The debate

Both crypto companies and regulators have been involved in the debate of whether a few cryptocurrencies should be regarded as securities and there has not been a concrete answer. Based in San Francisco, Ripple Labs is currently embroiled in an ongoing lawsuit with the SEC about its XRP token. The latter claims that the token is a security and not a cryptocurrency, as the company advertises.

The SEC has made these claims because of the Howey Test, which outlines the criteria that an asset has to meet in order to be declared as security. The SEC said that they consider any asset as security that requires investment and gives a profit generated through the efforts of others.

The position of the SEC is important because it means that some of the cryptocurrencies that are listed on the Coinbase platform may actually be classified as securities. This means that the exchange would have to remove them because it only offers regulated financial instruments.

It is also well-known that when it comes to token listings, Coinbase has been extremely conservative, as opposed to other exchanges. For instance, FTX and Binance both offer more than 300 tokens, while Coinbase only has 200.

The allegations that the SEC has made could have a big impact that will go beyond this situation. This makes it important for regulation clarity to be provided in order to avoid problems in the future.