Here's Matt Levine's column on this:

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Coinbase Chief Legal Officer Paul Grewal wrote a blog post:

The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to. …

The Wells notice comes out of the investigation that we disclosed last summer. Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none. …

Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only.

I sympathize with all of this, and I have written similar things. It is truly hard to fit the particular features of crypto into the existing US system for regulating securities, and a conscientious securities regulator with an interest in crypto regulation would sit down and write rules explaining how a project could register its crypto securities, how a crypto exchange could list crypto securities, etc. (Obviously Coinbase’s proposal to write those rules for the SEC is kind of self-interested, but sure in general regulation proceeds with industry input.)

On the other hand I think that the SEC’s response is straightforward and obvious:

There absolutely are existing, reasonably clear rules about how you register securities.
Yes, you’re right, it’s impossible for crypto tokens to follow those rules.
Oh well! Guess that means crypto exchanges are illegal.

The position of Coinbase — and of the crypto industry more broadly — is “look, SEC, if you want to have a flourishing system of legally compliant, safe, trustworthy crypto assets, you will need to work with us a little bit to write new rules,” and the position of the SEC is “no, we don’t want that, we want all of you to go away forever.” If Bernie Madoff came to the SEC and said “if you want a higher class of more trustworthy Ponzi schemes, you will need to write a few new rules adapting the disclosure regime to Ponzi schemes,” the SEC would have said “no we absolutely do not want that, we want much less Ponzi scheming, and we certainly do not want to give our approval to Ponzi schemes by writing rules for them.” One gets the sense the attitude to crypto is similar.

On the other hand Coinbase is an SEC-registered public company with an SEC-registered broker-dealer license! The approval is kind of already there! The SEC’s attitude to crypto is extremely negative, but it is only slowly getting around to doing anything about it — and in particular it is only slowly getting around to going after big respectable crypto firms like Coinbase. And in the interim, those firms have had time to get bigger and more respectable, with the SEC’s quiet acquiescence.

Here again I think the explanation is obvious but unsatisfying. I wrote last month:

I submit to you that the main fact of crypto regulation in early 2023 is that regulators feel really burned by the events of 2022, and particularly by the collapse of FTX. “We want to work with these nice smart young people who are building the financial system of the future, and I am sure that with their advice we can write smart regulations that protect consumers while still fostering innovation” was a totally normal thing for regulators (except the SEC) to think and say in 2021. But now it is not! Now too many of those smart young people are under indictment or giving interviews from undisclosed locations; too much customer money is gone. If you run a crypto exchange and you want to set up a meeting with regulators to talk about how to write regulations to prevent a repeat of the recent crypto collapses, they will not trust you, because that is what FTX was saying too. There is not much goodwill left. …

When crypto is popular and exciting and going up, if you are a regulator who says “no, we must stop this,” you look like a killjoy. Investors want to put their money into stuff that is going up, and they are mad at you for stopping them. Politicians like the stuff that is going up, and hold hearings about how you’re stifling innovation. Crypto founders are rich and popular and criticize you on Twitter and get a lot of likes and retweets. Your own regulatory employees, who have an eye on their next private-sector jobs, want to be leaders in crypto innovation rather than just banning everything.

When crypto is going down and so many projects are evaporating in fraud and bankruptcy, you can kind of say “I told you so.” There is just a lot more appetite to regulate, or I guess just to shut everything down. “You are stifling innovation,” the indicted founder of a bankrupt crypto firm can say, but nobody cares.

This is unsatisfying, first of all, from a rule-of-law perspective: The SEC used a light touch in regulating crypto on the way up, which encouraged a lot of companies (like Coinbase) to get into crypto, invest a lot of resources, hire a lot of people and build big businesses. (And which encouraged lots of people to invest in crypto, on the theory that if it was really bad the SEC would have stopped it.) If the SEC now says that was all illegal, it seems harsh and arbitrary. As Armstrong says, the SEC had plenty of opportunities to object to Coinbase in the past; it didn’t, and Coinbase relied on the SEC’s acceptance in building its business. The answer — “we would have objected in 2021, but crypto was cool then and people would have gotten mad at us for getting in the way, but now crypto is bad and we can do whatever we want” — does not feel like great regulatory procedure.

It is also bad substantive regulation — bad consumer protection — to encourage crypto on the way up and crack down on after the crash. Stopping people from investing in crypto after they’ve lost all their money doesn’t do them any good! You want to stop the crash! You want to “take away the punch bowl just as the party gets going,” but that is easy to say and hard, politically, to do. When the party is over and everyone is nursing a crushing hangover, no one cares what you do with the punch bowl. “Ugh that punch bowl, get it out of here, what even was in that,” they will retch.