SEC Objects To Coinbase Role In Celsius Repayments

The SEC has numerous reasons to paint Coinbase in a poor light.

Coinbase plays an important role in many new ETF applications.

The SEC is seeking to prevent Coinbase from playing a role in distributing assets from bankrupt crypto lender Celsius to users who lost funds when the organization halted transfers and withdrawals in June 2022.

Celsius has proposed a plan for reorganization that would see Coinbase—one of the most trusted and regulated crypto exchanges in the world—provide brokerage and services to Celsius, and allowing customers to claim a share of the remaining crypto, which has been locked on the platform for over a year.

However, the SEC is still engaged in legal disputes with both Celsius and Coinbase, having sued the organization earlier this year on the grounds that it has been operating an unregistered securities exchange.

Fallen Giant

In its heyday, Celsius was one of the largest organizations in the crypto space, with $8 billion in loans and $12 billion under management. Concerns had long been expressed (including by crypto custodian Prime Trust) about the company's practice of "endlessly rehypothecating assets", that is, engaging in a cycle of lending effectively the same crypto over and over, increasing yields through leverage but also raising the risk of default if the market moved too far one way or the other. Significant losses incurred following the collapse of Terra/Luna appear to have tipped the balance and brought the house of cards crashing down.

Coinbase, as a trusted organization in the space, is the ideal partner to take over and help distribute recovered assets back to customers.

Ulterior Motives?

It would be embarrassing for the SEC if an organization they are currently suing were allowed to participate in such a high-profile and trusted process. However, Coinbase's role in the crypto space is now far larger and more important than this case alone. As the US's premier crypto exchange, Coinbase has taken on a pivotal role in a slew of applications for a Bitcoin spot ETF.

Coinbase is a lynchpin of the US crypto scene: A large, trusted, compliant (as much as is possible, given the state of crypto regulation in the country) exchange, with tens of millions of customers. One recent analysis by Arkham showed that Coinbase controls around 1 million BTC, in both customer deposits and their own funds, making them the largest holder of BTC in the world, alongside Satoshi.

Spot Bitcoin ETFs need a custodian to hold the BTC they represent securely, and there's no one better in the US than Coinbase.

A recent court verdict in favor of Grayscale, and Bitwise's ETF application update, remove one of the key grounds for the SEC to refuse an ETF. Yet the regulator is clearly unwilling to approve one, and so will need new grounds to deny it.

By painting Coinbase in as poor a light as possible, and maintaining legal action against the exchange, the SEC has its reason. As Adam Cochran writes, "If this is the line they are taking, then it's a really good bet they are going to continue to fight the spot ETFs but now on the basis that there is no valid custodian and ATS registered for exchanging the spot assets."

TL;DR expect the legal war between the SEC and Coinbase to grind on, and for the SEC to come up with new reasons to delay a spot ETF further.

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