Today, the Securities and Exchange Commission (SEC) hit Coinbase, Inc., a leading cryptocurrency exchange, with a significant blow. The SEC accused Coinbase of operating its crypto asset trading platform unlawfully as an unregistered national securities exchange, broker, and clearing agency. Furthermore, the SEC pointed out that Coinbase failed to register its offer and sale of the crypto asset staking-as-a-service program.
The SEC’s complaint underscores that since at least 2019, Coinbase has been amassing billions through facilitating the buying and selling of crypto asset securities illegally. It appears Coinbase intertwined the traditional services of an exchange, broker, and clearing agency without registering any of these functions with the Commission as the law demands. This has, consequently, exposed investors to potential risks.
Coinbase’s Unlawful Actions
Specifically, Coinbase provided a marketplace that combined orders for securities from various buyers and sellers. This was achieved through established, non-discretionary methods, which allowed these orders to interact. Additionally, it got involved in executing securities transactions for Coinbase customers’ accounts.
Interestingly, Coinbase also offered facilities for data comparison regarding the terms of settlement of crypto asset securities transactions. It served as an intermediary in settling transactions in crypto asset securities by its customers and acted as a securities depository. Coinbase’s failure to register these services resulted in depriving investors of crucial protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.
SEC Allegations on Coinbase’s Parent Company
Intriguingly, the SEC’s complaint doesn’t stop at Coinbase. It extends to Coinbase’s parent company, Coinbase Global Inc. (CGI), alleging that CGI, as a controlling entity of Coinbase, shares liability for certain of Coinbase’s violations.
Unregistered Staking-as-a-Service Program
Since 2019, the SEC alleges, Coinbase engaged in an unregistered securities offering through its staking-as-a-service program. This program allowed customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts. Despite the service’s widespread use, Coinbase neglected to register its offers and sales as mandated by law, leading to this charge.
Officials’ Statements
SEC Chair Gary Gensler elaborated on the issue, stating, “Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions.” He added, “Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC.”
The Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, expressed a stern stance: “You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great.” He emphasized that Coinbase’s deliberate neglect of the federal securities laws resulted in investor detriment.
Legal Consequences
The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that both Coinbase and CGI violated registration provisions of the Securities Exchange Act of 1934. Furthermore, Coinbase is charged with violating the securities offering registration provisions of the Securities Act of 1933. The SEC seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief.
The SEC acknowledges the assistance of a multi-state task force of ten state securities regulators led by California. This coalition includes Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin, all of whom played a role in bringing these charges to light.
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