Coinbase (COIN) shares are tumbling after-hours, down almost 20% on the day, following its disclosure that it received a notice from the SEC formally declaring the securities regulator’s plans to bring an enforcement action against the largest US crypto exchange.

SEC Chair Gary Gensler has repeatedly said many of the tokens and products offered by crypto companies are securities and that the trading platforms need to register with his agency, and in a filing this afternoon, Coinbase said the so-called Wells notice regards aspects of its exchange as well as the staking service Coinbase Earn and Coinbase Wallet.

Bloomberg reports that representatives from Coinbase have met with the SEC more than 60 times over the last nine months to try to resolve the issues, but those talks haven’t been fruitful, according to a person familiar with the matter.

“We are prepared for this disappointing outcome and confident in the legality of our assets and services,” Paul Grewal, chief legal officer of Coinbase, said in a statement.

“If needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”

This isn’t the first time Coinbase has received a Wells notice.

The SEC warned the company in 2021 that it considered the company’s proposed “Lend” product, which would have allowed users to earn interest by lending out their crypto holdings, to be a security. The exchange later canceled the launch.

Coinbase CEO Brian Armstrong took to Twitter to explain:

Today Coinbase received a Wells notice from the SEC focused on staking and asset listings.

A Wells notice typically precedes an enforcement action.

Two years ago the SEC reviewed our business in detail and approved Coinbase to go public. Our S1 clearly explained our asset listing process and included 57 references to staking.

Coinbase runs a rigorous asset review process and has rejected more than 90% of assets that have applied to be listed on the platform.

While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.

We are proud to stand up for our customers and the industry in these moments.

Going forward the legal process will provide an open and public forum before an unbiased body where we will be able to make clear for all to see that the SEC simply has not been fair, reasonable, or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets.

In the meantime, Coinbase will continue to do what we do best: build the most trusted products and services in order to advance our purpose of updating the financial system, and creating more economic freedom in the world.

We're excited to work with all governments and regulators around the world who are focused on putting in place clear rules to regulate the crypto industry.

Additionally, Decrypt reports that earlier on Wednesday, Coinbase had notified users it will suspends Algorand staking rewards on March 29.

Last August, after the U.S. sanctioned Ethereum mixing service Tornado Cash and wallets that had used it, Armstrong said that if threatened by regulators, he would rather shut down Coinbase staking than censor transactions.

Armstrong concluded a subsequent blog post with a clear message to the regulators:

Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering.

In the meantime, the U.S. cannot afford for regulators to continue to threaten the good actors in the crypto industry for doing the same legal and compliant things they’ve always done.

This unfair approach will only drive innovation, jobs, and the entire industry overseas. At our core, we are the very same company that we were on April 14, 2021 when we became a public company at the end of the lengthy process with the SEC itself. We remain confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.

In the meantime, Coinbase will continue to do what we do best: updating the financial system by building the most trusted products and services to advance our mission of creating more economic freedom and opportunity around the world.

The Wells Notice follows the SEC's suing Tron founder Justin Sun (and a number of celebrities) on allegations the TRX and BT tokens are unregistered securities (among other charges).

Does anyone else see a very recent pattern, between Silvergate, Signature Bank, and now this - did Liz Warren lay down the law to bring a dragnet against crypto?

1/ Today Coinbase received a Wells notice from the SEC focused on staking and asset listings. A Wells notice typically precedes an enforcement action.

— Brian Armstrong (@brian_armstrong) March 22, 2023

Who knows, maybe this could go to SCOTUS? Now that crypto has clearly become the Democrats' latest boogeyman.

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