Today, the Securities and Exchange Commission (SEC) accused Coinbase, Inc., a crypto asset trading platform, of operating as an unregistered national securities exchange, broker, and clearing agency. Coinbase was also slapped with a charge for its failure to register its crypto asset staking-as-a-service program.
Accusations of Operating an Unregistered Exchange, Broker, and Clearing Agency
The SEC claims that, since 2019, Coinbase has illegally amassed billions through facilitating the purchase and sale of crypto asset securities. The SEC maintains that Coinbase combines the conventional services of an exchange, broker, and clearing agency without having registered these services with the Commission as mandated by law. It is alleged that Coinbase, through these unregistered services.
Serves as a marketplace and connects multiple buyers and sellers' orders for securities using established, non-discretionary methods for order interaction;
Conducts the business of effecting securities transactions for Coinbase customer accounts; and
Offers facilities for comparing data concerning the settlement terms of crypto asset securities transactions, and acts as an intermediary and depository for securities.
The SEC's complaint also suggests that Coinbase's failure to register has left investors without crucial protections, such as SEC inspection, record-keeping requirements, and safeguards against conflicts of interest.
It is also alleged that Coinbase Global Inc. (CGI), the parent company of Coinbase, has control over Coinbase and is consequently liable for some of its transgressions.
Unregistered Offer and Sale of Securities via Staking-as-a-Service Program
According to the SEC, Coinbase has been conducting an unregistered securities offering through its staking-as-a-service program since 2019. The program allows customers to earn profits from the proof of stake mechanisms of certain blockchains and Coinbase's activities. It is alleged that Coinbase failed to register its offers and sales of this staking program as mandated by law.
“Coinbase has allegedly offered unregistered exchange, broker-dealer, and clearinghouse functions, despite being bound by the securities laws,” stated SEC Chair Gary Gensler. He continued that Coinbase's alleged missteps deprive investors of necessary protections, including safeguards against fraud and conflict of interest, proper disclosure, and routine SEC inspection.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, commented, “Coinbase was fully aware of the federal securities laws and chose to ignore them. Its calculated decisions may have allowed it to earn billions, but at the expense of investors.”
The SEC's complaint, filed in U.S. District Court for the Southern District of New York, alleges violations of certain registration provisions of the Securities Exchange Act of 1934 by Coinbase and CGI, and of the Securities Act of 1933 by Coinbase. The SEC seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief.
The SEC’s investigation involved several members of the Division of Enforcement’s Crypto Assets and Cyber Unit and regional offices. The SEC expressed gratitude for the assistance of a multi-state task force of ten state securities regulators, led by California.
The SEC's charges against Coinbase could have significant implications for the broader cryptocurrency industry. Here are a few potential effects:
Regulatory Clarity: This legal action might force the issue of regulatory clarity in the crypto industry, a sector often criticized for its lack of clear rules and oversight. Whether or not the charges against Coinbase lead to a conviction, the process will likely shed more light on how existing securities laws apply to cryptocurrencies and related services.
Increased Scrutiny: The charges against Coinbase could serve as a warning for other crypto exchanges and platforms that the SEC is closely scrutinizing the industry. This could lead to companies becoming more cautious in their operations and seeking to ensure that they are in compliance with securities laws.
Potential Changes in Business Models: If Coinbase's staking-as-a-service program is deemed a security, similar services offered by other platforms could also be classified in the same way. This could lead to significant changes in how these services are offered, potentially making them less accessible to average investors.
Investor Confidence: The case could either hurt or boost investor confidence in the industry. On one hand, regulatory action might cause some investors to pull back, fearing more legal troubles in the future. On the other hand, it could boost confidence among investors who see regulatory oversight as a means of reducing fraud and protecting their investments.
Market Uncertainty: The charges may introduce a period of uncertainty to the market, affecting cryptocurrency prices. If investors interpret the SEC's actions as a crackdown on crypto, it could trigger a sell-off, leading to price drops. Conversely, a successful defense by Coinbase could bolster the crypto market by setting a precedent for resisting regulatory overreach.
By John Montague