TD Cowen analysts reflected on today’s developments after the U.S. Securities and Exchange Commission (SEC) sued cryptocurrency exchange Coinbase Global (NASDAQ:COIN) for allegedly providing illegal trading services.
Moreover, the SEC said Coinbase is operating an illegal staking program as it failed to register this service with the regulators.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler.
“In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC.”
As a result, Coinbase shares fell 16% on Tuesday after dropping 9% on Monday after the U.S. SEC sued Coinbase’s rival Binance and its founder Changpeng Zhao.
Analysts believe the ruling in this legal fight “could force Democrats to compromise and push Congress to enact a crypto regulatory bill.” If SEC loses the fight, it could force President Biden and Democrats to make a compromise on their stance.
“This needs to be viewed in conjunction with the litigation the SEC brought yesterday against Binance as the two complaints allege many of the same violations. Assuming Binance fights, it could set up two court decisions that could clarify the law,” they added in a note.
Analysts also believe that a “critical” development in this legal fight could be if SEC requests a temporary injunction to prevent Coinbase from continuing to trade tokens on its platform or to provide staking services.
“A fight over a temporary injunction could give Coinbase an edge as the legal standard for a temporary injunction is higher than for winning the case on its merits,” they added.
All-in-all, analysts highlight that only Congress can “end the policy chaos” surrounding the crypto ecosystem. While today’s development is not positive for Coinbase, it is positive for the wider crypto space.
“As for the merits of this case, we give the edge to the SEC as the SEC gets to decide which cases to bring. We also believe judges may be reluctant to conclude that the federal government lacks the power to regulate crypto products that are performing similarly to traditional financial products,” they concluded.