The US Securities and Exchange Commission’s scrutiny of digital currencies that are listed on Coinbase Global Inc. is igniting concerns that a major crackdown for the rest of the industry is imminent.

Digital coins are headed for a losing week, dragged down by the revelation that the SEC has been investigating whether Coinbase shirked regulations by offering trading in certain tokens. Anxieties were already running high after the regulator took the unusual step of identifying several crypto assets that it considered to be securities as part of an insider trading case.

The SEC lawsuit against a former Coinbase manager and two others, coupled with the probe into the platform’s listings, signal that after more than a year of warnings by Chair Gary Gensler the regulator’s stance appears to be hardening. Meanwhile, the agency’s assertion last week that nine tokens fall under its jurisdiction is drawing pushback inside the Commodity Futures Trading Commission, the US derivatives watchdog that also oversees crypto.

“This is a shot across the bow of the industry, not just across one boat within that armada,” said James Cox, a professor specializing in securities law at Duke University School of Law.

The SEC on July 21 accused one of Coinbase’s former employees of violating its insider-trading rules by leaking information to help his brother and a friend buy tokens just before they were listed on the platform. The regulator said it was its first for crypto insider trading.

Federal prosecutors in Manhattan also charged the three men with wire fraud conspiracy and wire fraud. Neither the SEC nor Justice Department accused Coinbase of wrongdoing.

Bitcoin advanced 2.3% and Coinbase rose 7.2% on Wednesday at 10:28 a.m. in New York, rebounding from declines on Tuesday. Bitcoin tumbled more than 5% and Coinbase plunged 21% Tuesday after Bloomberg News reported that the firm was facing a US probe into whether it improperly let Americans trade digital assets that should have been registered as securities.

A more aggressive approach by the SEC in asserting that specific tokens are securities would be problematic for the industry because such a label triggers strict investor-protection requirements. Crypto enthusiasts say many of those strictures are incompatible with digital assets. A previous move by the regulator’s enforcement division to crack down on initial coin offerings resulted in a sharp decrease in that corner of the crypto market. 

Regulators at the CFTC, which was also looking into the insider trading allegations, were put off by the SEC’s move last Thursday to declare that nine tokens -- including seven that trade on Coinbase -- were securities and under its purview, according to two people familiar with the matter, who asked not to be named to discuss internal discussions.

CFTC officials have said that Bitcoin, the largest cryptocurrency, and Ether, the second biggest, are commodities and under its jurisdiction. However, the legal status of thousands of other tokens -- including those named last week in the SEC’s lawsuit -- has remained more murky.

To decide if a digital asset is a security, the SEC applies a legal test, which comes from a 1946 US Supreme Court decision. Under that framework, the agency considers a token generally to be under SEC purview when it involves investors kicking in money to fund a company with the intention of profiting from the efforts of the organization’s leadership.

CFTC staff have argued internally that some of the tokens the SEC identified in its complaint as securities could just as easily be considered commodities. Some have expressed concerns that the SEC case could set a precedent that the derivatives regulator needs permission to pursue digital-asset cases, one of the people said.

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