Coinbase also faces charges for conducting an unregistered securities offering through its staking-as-a-service program.
Washington D.C., June 6, 2023 — The Securities and Exchange Commission (SEC) has taken action against Coinbase, Inc., alleging that the cryptocurrency exchange operated without registering as a national securities exchange, broker, and clearing agency. Coinbase is also charged with failing to register its crypto asset staking-as-a-service program.
Unregistered Exchange, Broker, and Clearing Agency
According to the SEC’s complaint, Coinbase has, since at least 2019, facilitated the trading of cryptocurrency securities without complying with regulations. The SEC contends that Coinbase effectively combined the functions of an exchange, broker, and clearing agency without obtaining the necessary registrations, a violation of legal requirements. Through these unregistered services, Coinbase is alleged to have:
- Provided a marketplace that matched buy and sell orders for cryptocurrency securities using established, non-discretionary methods.
- Engaged in securities transactions for Coinbase customers.
- Offered facilities for comparing data related to cryptocurrency securities settlement terms.
- Acted as an intermediary in settling cryptocurrency securities transactions and served as a securities depository.
The SEC asserts that Coinbase’s failure to register has left investors without essential protections, including oversight by the SEC, recordkeeping obligations, and safeguards against conflicts of interest.
Additionally, the SEC’s complaint claims that Coinbase’s parent company, Coinbase Global Inc. (CGI), exercised control over Coinbase and shares liability for some of Coinbase’s violations.
Unregistered Offering and Sale of Securities in the Staking-as-a-Service Program
The SEC alleges that Coinbase has conducted an unregistered securities offering through its staking-as-a-service program since 2019. This program allows customers to earn profits through “proof of stake” mechanisms in specific blockchains and Coinbase’s efforts. In this staking program, Coinbase is said to have pooled customers’ stakeable crypto assets, staked the pool for blockchain transaction validation, and distributed a portion of the rewards to customers whose assets were part of the pool. Coinbase failed to register these offerings and sales, as required by law.
SEC Chair Gary Gensler commented, “Coinbase, despite being subject to securities laws, allegedly combined and unlawfully offered exchange, broker-dealer, and clearinghouse functions. In traditional securities markets, these functions are separate. Coinbase’s alleged actions have deprived investors of crucial protections, including anti-fraud and anti-manipulation safeguards, transparent disclosure, conflict of interest prevention, and regular SEC oversight. Furthermore, Coinbase never registered its staking-as-a-service program, denying investors necessary disclosures and protections.”
Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, emphasized, “Ignoring rules that exist for the protection of the investing public has significant consequences. Coinbase, as alleged in our complaint, was fully aware of the applicability of federal securities laws to its business activities but deliberately chose not to comply. While Coinbase may have profited immensely from its decisions, it did so at the expense of investors, depriving them of their rightful protections. Today’s action seeks accountability for Coinbase’s choices.”
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, accuses Coinbase and CGI of violating certain registration provisions of the Securities Exchange Act of 1934 and Coinbase of violating securities offering registration provisions of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains with interest, penalties, and other equitable remedies.
The SEC’s investigation was conducted by the Division of Enforcement’s Crypto Assets and Cyber Unit, with assistance from the San Francisco Regional Office. The litigation will be managed by the SEC’s legal team, with support from various regional offices.
The SEC acknowledges the collaboration of a multi-state task force led by California and including regulators from Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.
- What is Coinbase’s response to the SEC’s allegations?Coinbase is currently evaluating the SEC’s allegations and plans to cooperate fully with the investigation. We are committed to addressing any concerns raised by regulators while continuing to provide a secure and reliable platform for our users.
- How will the SEC’s actions against Coinbase affect cryptocurrency traders?The impact of the SEC’s actions on cryptocurrency traders is uncertain. However, we recommend staying informed about regulatory developments and adhering to best practices in compliance and security when using our platform.
- Is my cryptocurrency safe on Coinbase during this legal challenge?Yes, Coinbase remains dedicated to the safety and security of user assets. We will continue to implement robust security measures to protect your cryptocurrency holdings.
- What should I do if I have investments in Coinbase’s staking-as-a-service program?If you have investments in the staking-as-a-service program, it’s essential to monitor the situation closely. We will provide updates on any changes or developments that may impact your investments.
- Can I still use Coinbase for trading and investing while this legal case is ongoing?Yes, you can continue to use Coinbase for trading and investing in cryptocurrencies. We recommend staying informed about the legal case and following any updates or guidelines provided by Coinbase.
- Will Coinbase users receive compensation if the SEC’s allegations are proven true?Compensation will depend on the outcome of the legal proceedings. Coinbase will take appropriate actions to address any regulatory issues and ensure the best interests of its users.
- How can I stay updated on the progress of this legal case?You can stay updated by visiting Coinbase’s official website and following our official social media channels. We will provide regular updates on the situation and its potential impact.
- What steps is Coinbase taking to enhance regulatory compliance?Coinbase is committed to regulatory compliance and will work closely with relevant authorities to address any concerns. We will also review and strengthen our compliance procedures as needed.
- Are there any changes in Coinbase’s services or features due to the SEC’s actions?Currently, there are no immediate changes to Coinbase’s services or features. We will continue to provide our users with a seamless and secure trading experience.
- What can I do as a Coinbase user to protect my investments and assets?As a Coinbase user, it’s advisable to follow best security practices, such as enabling two-factor authentication, using hardware wallets for long-term storage, and staying informed about cryptocurrency regulations in your jurisdiction.