On Wednesday, the US Securities and Exchange Commission (SEC) issued a notice to Coinbase, a major cryptocurrency exchange, warning that the company may be violating US securities laws. The news caused Coinbase shares to drop nearly 12% in after-hours trading.

In a regulatory filing, Coinbase stated that they believe potential enforcement actions will involve their spot market, Coinbase Earn, Coinbase Prime, and Coinbase Wallet. A potential civil action may result in injunctive relief, return of funds, and civil penalties.

This move by the SEC is part of an ongoing effort to crack down on the cryptocurrency industry and companies that tout unregistered securities. It was first reported in mid-2022 that the SEC was investigating Coinbase.

The cryptocurrency market faced multiple challenges before the collapse of the cryptocurrency exchange FTX in November last year. Rising dollar interest rates and a trend of investors withdrawing from risky assets caused the collapse of stablecoin Terra and the cryptocurrency hedge fund Three Arrows Capital, as well as the exchanges Celsius and Voyager.

The notification from the SEC is usually one of the final steps before charges can be formally filed. It provides potential defendants with an opportunity to respond to the SEC’s views and outlines the SEC’s regulatory views and logic.

In response to the notice, Coinbase said the investigation was “sketchy,” and the notice did not provide much information about the possible breach. Paul Grewal, Coinbase’s chief legal officer, said in an official blog post that the company is confident in the way its business is run and that it will demonstrate this to the SEC when they become a public company in 2021. Coinbase said its cryptocurrency exchange will continue to operate normally until the legal process is resolved.

Grewal said that Coinbase is prepared for this outcome and confident in the legality of its assets and services. “If necessary, we welcome the legal process to provide the transparency we have always advocated and demonstrate that the SEC’s involvement with digital assets is unfair or unreasonable.”

The SEC sent the same notice to stablecoin issuer Paxos in February. A Paxos spokesperson said at the time that they would engage with the SEC staff on this matter and actively prepare litigation if necessary.

Grewal said that Coinbase wants to seek better regulatory transparency. “Tell us the rules, and we’ll follow them. Give us the path to registration, and we’ll register the parts of our business that need to be registered,”

Overall, this notice from the SEC to Coinbase serves as a reminder that regulators are keeping a close eye on the cryptocurrency industry and will take action against companies that violate securities laws. While the legal process plays out, Coinbase will continue to operate normally, but it remains to be seen how this will impact the company’s long-term growth and success in the cryptocurrency market.