Shares of cryptocurrency and blockchain-related companies fell early on Tuesday after the industry's biggest exchanges Coinbase and Binance found themselves in the crosshairs of the US securities regulator.
The US Securities and Exchange Commission (SEC) sued Coinbase, accusing it of illegally operating without registration with the regulator. The SEC also filed a lawsuit against Binance and its CEO on Monday.
Both cases are part of SEC Chair Gary Gensler's push to assert jurisdiction over crypto and offer better protection to investors who trade virtual currencies.
"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," Gensler said in a tweet.
In a complaint filed in Manhattan federal court on Tuesday, the SEC said Coinbase has since at least 2019 operated as an unregistered broker by handling cryptocurrency transactions, evading the disclosure requirements meant to protect investors.
The lawsuit addressed several aspects of Coinbase's business including Coinbase Prime, which routes orders; Coinbase Wallet, which lets investors access liquidity; and the Coinbase Earn staking service.
In the staking program, Coinbase pools crypto assets and uses them to facilitate activity on the blockchain network, in exchange for "rewards" it provides customers after taking a commission for itself.
The SEC said Coinbase was "fully aware" that its business was subject to federal securities laws, but ignored it.
"You simply can't ignore the rules because you don't like them or because you'd prefer different ones," SEC Enforcement Chief Gurbir Grewal said in a statement.
In the Binance case, the SEC accused that exchange of inflating trading volumes, diverting customer funds, improperly commingling assets, failing to keep wealthy US customers off its platform, and misleading customers about its controls.
Coinbase shares fell 16% in premarket trading, while blockchain farm operator Bitfarms' stock dropped 4.5%.
Bitcoin, the world's biggest cryptocurrency, moved lower on the news.
Crypto miners Riot Platforms, Marathon Digital and Hut 8 Mining fell between 1.3% and 5.4% before the bell.
Global regulators have been keeping a close watch on the crypto world after a string of high-profile collapses wiped out more than a trillion dollars from the digital assets industry's market capitalization last year.
Coinbase disclosed in March that it received a "Wells notice" from the SEC threatening a potential lawsuit over certain products.
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