The SEC is now going after Coinbase as part of its war on cryptocurrency. Here’s how U.S. buyers may be impacted.

One of the most famous places to trade cryptocurrencies is being sued by the U.S. federal government.

According to CoinMarketCap.com, the U.S. Securities and Exchange Commission sued the second-largest cryptocurrency exchange by volume, Coinbase, on June 6. In a news statement from June 6, the federal regulator said that Coinbase used its platform for dealing with crypto assets without being recognized as a national stock exchange or dealer.

In the lawsuit, the SEC also says that at least 13 of the crypto assets that Coinbase made available to users, such as Solana and Cardano coins, are “crypto asset securities.”

The SEC says that Coinbase’s staking program is an investment contract and illegal security. The SEC describes the program as a way for crypto owners “to earn financial returns through Coinbase’s management efforts.”

Brian Armstrong, co-founder and CEO of Coinbase, tweeted after the SEC’s statement, “Regarding the SEC’s complaint against us today, we’re proud to represent the industry in court to finally get some clarity around crypto rules.”

In a statement to CNBC Make It, Coinbase’s chief legal officer and general counsel Paul Grewal said, “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry hurts America’s economic competitiveness and companies like Coinbase that have shown a commitment to compliance.” “For the time being, we’ll keep doing business as usual.”

This comes just one day after the SEC sued Binance, the biggest cryptocurrency market in the world, and Changpeng Zhao, its wealthy founder. On June 5, the agency filed 13 charges against both of them. One of the charges said that Zhao and his exchange worked to “secretly allow high-value U.S. customers” to keep trading on its unregulated international exchange, even though they said in public that U.S. customers weren’t allowed to do so, according to a press release from June 5.

Zhao has said on Twitter that the claims are false.

What the SEC’s move against cryptocurrency could mean for investors

“The harsh language coming from the agency and its chair Gary Gensler is a sign that the SEC may be doing exactly what many in the industry have thought: shutting down crypto in the U.S.,” Chen Arad, co-founder and chief experience officer of Solidus Labs, a company that makes tools to help crypto exchanges and institutions stop market manipulation, tells CNBC Make It.

The U.S. is still a very important market for crypto companies. A January NBC News study found that about 20% of Americans have invested in, traded, or used cryptocurrency. About 42% of Americans between the ages of 18 and 34 say they’ve tried dealing with cryptocurrency.

Arad says that even so, platforms may want to avoid the governmental risks that come with working here and instead focus on countries with better laws.

Omid Malekan, an associate professor at Columbia Business School and the author of “Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms,” agrees. Due to the difficult legal environment, he tells CNBC Make It, some crypto firms may choose to limit the services they offer to U.S. customers.

“That’s bad news for U.S. investors,” he says. “It means they’ll have less to choose from and will probably have to pay more.” Malekan owns stock in Coinbase and has been a customer for a long time.

The SEC’s new move to crack down on crypto markets could have a good side. Arad says that now that the cases have been filed, the platforms can reply to the claims in open court, where anyone can listen.

But Malekan says you shouldn’t expect crypto buyers to leave markets all at once any time soon. “Those who are staying away or leaving have already done so,” he says. “Those who are still investing and using services like Coinbase are probably fine with the risks.”

Even though the way regulations are changing in the U.S. can have some effect on demand, Arad says that people who want to buy crypto will still find ways to do so. One of the best and easiest ways is to use known crypto markets that are controlled in the U.S.

Does the lawsuit have anything to do with Bitcoin?

The SEC’s lawsuit didn’t mention Bitcoin, which is one of the most well-known coins. Under the Commodity Exchange Act, Bitcoin has been ruled to be a commodity. This means that, in most cases, the Commodity Futures Trading Commission is in charge of regulating it.

Malekan says that most people in the business agree that if you only trade Bitcoin, you’re probably fine.

When the SEC made its statement, the price of cryptocurrencies went up for a short time. Coin Metrics says that the price of Bitcoin rose to just over $27,100 on June 6. Coin Metrics says that as of June 12 at 11:09 a.m. EDT, the price of Bitcoin had dropped to about $25,800.

How crypto platforms in the U.S. are regulated.

At the moment, the “Howey test” is one way for the SEC to figure out if an asset is an investment contract and, therefore, a security. The agency views an object to be a security that may be subject to federal securities law if it meets the following criteria:

  1. There is an input of money in a shared business, and the owner expects a return. 
  2. The return comes from the work of others, though.

Malekan says that crypto questions a lot of these older legal norms and may need a new set of rules.

“We don’t have the same rules for self-driving cars as we did for horse and buggy,” he says. “If we have new financial tools, we might need new rules.”

A cryptocurrency market is different from peer-to-peer trading.

Malekan says that in the long run, it might not matter how the government regulates crypto trading sites.

He says, “The whole point of crypto is that you don’t have to depend on these kinds of middlemen.” “Most people use them anyway because they make life easier, but digital assets like bitcoin and many other cryptocurrencies exist outside of that system.”

One thing that makes cryptocurrency special is that it can be sold directly between buyers and sellers. This is usually done by getting a virtual wallet or hardware wallet from a reputable company and then making a public key and a private key.

But these wallets don’t hold your cryptocurrency. Instead, they read the public record that shows your balance and store your private key, which is like a password and lets you access your crypto funds and make trades on a blockchain network.

After you’ve set up your wallet and saved a copy of your keys, you’re ready to buy crypto. This can be done in many ways. Peer-to-peer transfer services like CashApp let users buy and sell bitcoin, and Paypal lets users buy and sell four cryptocurrencies, including bitcoin and ether.

When deciding whether to use a market to trade your crypto or to do it peer-to-peer, there are pros and cons to both. Malekan says that using an exchange may give you peace of mind because you know you can call a company if something goes wrong with a deal. But there is still a chance that a trade could be hacked.

You’ll have more power over your money if you hold and trade your own digital assets, but you’ll also have to take care of your own safety and security. If you forget your private key, you could get locked out of your own bank and not be able to get to your crypto.

Whether you trade crypto through a market or peer-to-peer, Malekan says you should only play with money you’re willing to lose. And many people who know about money would agree. Crypto is thought to be a very risky asset whose value can change quickly and go up or down.