[co-authors: Stephanie Kozol*, Justin Karlin]
On June 6, Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin each filed enforcement actions against leading cryptocurrency exchange Coinbase and its parent, alleging that Coinbase’s staking rewards program constituted unregistered securities sales in violation their states’ securities laws. These actions followed an investigation by a multistate task force with assistance from the Securities and Exchange Commission (SEC).
The actions alleged that Coinbase offered and sold unregistered securities based on its staking rewards program. Under the program, holders of cryptocurrency “stake” deposited digital assets to validate transactions on the blockchain, with Coinbase paying out additional digital assets to depositors who stake their assets and receiving a commission from the profits. Neither the Federal Deposit Insurance Corporation (FDIC) nor the Securities Investor Protection Corporation (SIPC) insure the program. As of March 29, approximately 3.5 million staking reward program accounts nationwide existed, valued at approximately $4.8 million.
Each state issued cease-and-desist orders, and some ordered additional financial and nonfinancial penalties, including permanently barring Coinbase from doing business in the state. All provided the opportunity for a hearing before finalizing the order and related penalties. Each state argued that Coinbase needed to register the staking rewards program with the proper securities regulator in their state, obtain an exemption under the state’s securities law, or be designated as a federally covered security because the program constitutes an investment instrument for cryptocurrency holders. Most of the enforcement actions do not prohibit the program so long as the program complies with the state’s securities law.
Why It Matters
The enforcement actions against Coinbase are significant because they represent a growing trend of increased, bipartisan regulatory enforcement in the cryptocurrency space at the state and federal levels. Companies operating in the industry must stay informed about relevant laws and regulations and work closely with legal counsel to ensure compliance. This is especially important given the complexity and rapidly evolving nature of the industry. As the regulatory framework for cryptocurrencies continues to develop, companies must prioritize compliance to avoid potential legal and reputational risks.
*Senior Government Relations Manager
