(Bloomberg) -- Coinbase Global Inc. knew all along that it could be courting trouble with regulators. 

More than two years ago, when the crypto exchange filed with the US Securities and Exchange Commission to start publicly trading its shares, it said there was a “high degree of uncertainty” regarding the legality of its operations, warning that “regulators may disagree” with the company’s view that it wasn’t covered by their rules. 

That possibility became reality on Tuesday, when the SEC sued Coinbase for failing to register with the agency as a broker, an exchange or a clearing firm — all roles that the company plays in a cryptocurrency market where many tokens are, according to the agency, actually unregistered securities. The regulator also alleged that Coinbase’s staking program, which allows customers to lock up their coins in return for a share of rewards offered by various blockchains, violates securities laws, as well. 

The charges came a day after the SEC brought a similar case against rival Binance Holdings Ltd., marking a sharp escalation of its efforts to rein in a shadowy industry that burned investors with blowups like the collapse of FTX last year. The SEC’s push is particularly fraught for Coinbase, which generated over 80% of its revenue in the US last year and is now facing a near existential threat to its business model.

“For Coinbase, this case is life or death since it is more concentrated on the US market,” said Ashok Ayyar, counsel at Ashbury Legal. “Expect Coinbase to litigate this vigorously — it is alleged that virtually their entire US business is illegal.”

Chairman and Chief Executive Officer Brian Armstrong responded to the suit on Twitter, saying he’s proud to represent the industry in court. He repeated his defense that the SEC had reviewed its business and allowed Coinbase to become a public company when it registered the stock. Yet the regulator made it clear in its complaint that approving the company’s plan to go public was not the equivalent of giving its business model a green light: “Declaring effective a Form S-1 registration statement does not constitute an SEC or staff opinion on, or endorsement of, the legality of an issuer’s underlying business.” 

Legal experts are inclined to agree. 

“Coinbase has publicly asserted that going public means the SEC has somehow approved their business or its legality — that is mistaken,” said Ayyar. “Going public just means the SEC reviews the offering prospectus and that the document meets the filing requirements. It is not a stamp of approval for the company, its products or businesses.”

Armstrong indicated that the company plans to challenge the SEC to get more legal clarity for his industry. One major issue will be which of the thousands of cryptocurrencies on the market are considered securities. Altcoins — tokens other than Bitcoin and Ether — made up almost half of Coinbase’s trading revenue in the first quarter of this year, according to a letter to shareholders. In its lawsuit, the SEC said several such coins are securities.

Oppenheimer & Co. analyst Owen Lau anticipates a long-term legal battle. While the company may operate normally in the short term, he said, the potential reputational damage caused by the SEC’s claims could lead users to pull their money from the platform. During the first quarter, Coinbase’s revenue was already less than a third of its late 2021 peak. Over the past two days, its shares have tumbled 20%.

In the longer term, Coinbase is facing a bigger hit should the SEC’s lawsuit prevail. The case could force the company to stop providing custody and trading of coins considered securities, threatening a big chunk of its business.

“If the SEC stops Coinbase from trading some tokens they deemed securities, that could have a huge impact on Coinbase’s financial health,” Lau said. “I would say the revenue at risk could be over 50%.”  

But, he added, it’s possible the SEC may not prevail on all of the charges: “The caveat is the probability to lose everything could be very low.”

The SEC also may seek to compensate customers who traded unregistered securities on Coinbase, according to John Reed Stark, a consultant and former chief of the SEC’s Office of Internet Enforcement.

“The SEC would figure out an amount of penalty and an amount of disgorgement and find a distribution agent to distribute the funds to aggrieved investors,” he said.

--With assistance from Olga Kharif and Emily Nicolle.

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