Legal and Regulatory Risks in Crypto Exchanges: How Non-Investor Litigation Reshapes Coinbase's Governance and Operational Risks

The cryptocurrency industry has long grappled with regulatory uncertainty, but recent legal developments underscore a pivotal shift in how exchanges like Coinbase navigate governance and operational risks. Non-investor litigation-ranging from state-level enforcement actions to shareholder lawsuits-has emerged as a critical force reshaping Coinbase's risk profile. These cases, while distinct in their legal frameworks, collectively expose vulnerabilities in the company's governance, transparency, and compliance strategies.

The SEC's Dismissal: A Strategic Retreat or a New Beginning?

In February 2025, the U.S. Securities and Exchange Commission (SEC) dismissed its high-profile enforcement action against Coinbase, a decision framed as part of a broader regulatory pivot toward clarity rather than enforcement, according to an SEC press release. Acting SEC Chairman Mark T. Uyeda emphasized the agency's intent to engage the public in crafting a "comprehensive and transparent regulatory framework" for crypto assets. While the dismissal was celebrated by Coinbase's leadership as a validation of its business model, according to a CNBC report, the lack of concessions from the company-no fines, no operational changes-left lingering questions about the SEC's strategic retreat.

This outcome, however, did not resolve all regulatory tensions. Instead, it created a vacuum that states like Oregon quickly filled. The Oregon Attorney General's April 2025 lawsuit accused Coinbase of violating state securities laws by facilitating the sale of unregistered cryptocurrencies. This case highlights a growing divide between federal and state regulators, with Coinbase challenging the state's authority and arguing that such actions fragment the regulatory landscape, as reported by Cointelegraph.

Shareholder Litigation: Governance Under Scrutiny

Parallel to regulatory pressures, Coinbase faced shareholder lawsuits alleging governance failures. A class-action suit led by Swedish pension fund Sjunde AP-Fonden accused the company of misleading investors about bankruptcy risks and the potential treatment of customer assets in insolvency proceedings, according to CryptoNews. The complaint also highlighted undisclosed proprietary trading practices, which critics argue exacerbated financial instability. A New Jersey federal judge rejected Coinbase's attempt to dismiss the case in September 2024, allowing claims about regulatory risk mismanagement to proceed, as reported by CoinDesk.

These legal challenges underscore a broader governance risk: the adequacy of Coinbase's internal controls and transparency. As noted by The Street, the company's stock price has historically been volatile in response to risk disclosures, with a 26% drop in May 2022 and a 12% decline in June 2023. Such volatility reflects investor concerns about whether Coinbase's leadership effectively communicates and mitigates operational and regulatory risks.

Operational Adjustments: Navigating a Fractured Regulatory Landscape

Coinbase's responses to these challenges reveal a dual strategy: legal defense and advocacy for federal preemption. The company has filed lawsuits against Oregon Governor Tina Kotek, seeking transparency in the state's reclassification of 31 crypto assets as securities, according to CryptoTimes. Additionally, Coinbase's Chief Legal Officer, Paul Grewal, has urged the U.S. Department of Justice to push for federal preemption of state blue-sky laws, arguing that state-level enforcement undermines regulatory coherence, as reported by ROIC.ai.

Operationally, Coinbase has also faced scrutiny over cybersecurity and data governance. A June 2025 cybersecurity incident led to a 7% stock price decline and triggered investigations into the board's fiduciary duties, as detailed in a Monexa analysis. This incident, coupled with shareholder lawsuits, has prompted Coinbase to enhance its risk management frameworks, though the effectiveness of these measures remains untested in the face of ongoing litigation.

The Broader Implications for Crypto Governance

The Coinbase cases illustrate a systemic challenge for crypto exchanges: balancing innovation with regulatory compliance in a fragmented legal environment. As noted by Today's General Counsel, the Oregon lawsuit tests the boundaries of state and federal authority, with potential precedents for other states pursuing similar actions. For investors, this fragmentation raises concerns about operational risks, including compliance costs, market fragmentation, and reputational damage.

Moreover, the interplay between shareholder lawsuits and regulatory actions highlights the importance of governance transparency. A federal appeals court's ruling that the SEC's denial of Coinbase's rulemaking petition was "arbitrary and capricious," as detailed in a Justia listing, signals a judicial demand for clearer regulatory guidance-a demand Coinbase has long echoed.

Conclusion: A Call for Regulatory Clarity

The legal and operational risks facing Coinbase are emblematic of the broader crypto industry's struggle to align with evolving regulatory expectations. While the SEC's dismissal of its case and the formation of the Crypto Task Force suggest a path toward clarity, state-level actions and shareholder litigation reveal persistent uncertainties. For investors, the key takeaway is that governance and operational resilience in crypto exchanges will increasingly depend on their ability to navigate both federal and state regulatory mosaics.

As the industry awaits formal guidelines from the SEC's Crypto Task Force-expected by year-end 2025, according to a Manatt client alert-Coinbase's experience serves as a cautionary tale: in a sector defined by innovation, legal preparedness and governance transparency are not just compliance imperatives but competitive advantages.