Coinbase, Inc., the popular crypto asset trading platform, is under fire as the Securities and Exchange Commission (SEC) accuses the company of operating as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register its crypto asset staking-as-a-service program, further intensifying the scrutiny on the digital asset exchange.
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More Details About the Coinbase SEC Complaint
According to the SEC’s complaint, Coinbase has allegedly facilitated the buying and selling of crypto asset securities worth billions of dollars since at least 2019, without complying with registration requirements. The complaint asserts that Coinbase’s operations encompass the functions of an exchange, broker, and clearing agency, which necessitate registration with the SEC. The commission claims that Coinbase offers a marketplace for multiple buyers and sellers to interact and execute securities orders, engages in securities transactions for customers, and provides settlement facilities and depository services for crypto asset securities.
The SEC argues that Coinbase’s failure to register has denied investors essential protections, including oversight from the regulatory body, recordkeeping obligations, and safeguards against conflicts of interest. By intertwining these critical functions without seeking regulatory approval, Coinbase has allegedly put investors at risk.
In addition to the charges against Coinbase, the SEC has implicated Coinbase Global Inc. (CGI), the company’s holding firm, as a control person liable for certain violations committed by Coinbase.
The SEC’s complaint also highlights Coinbase’s unregistered offer and sale of securities through its staking-as-a-service program. Launched in 2019, the program allows customers to earn profits by participating in the “proof of stake” mechanisms of select blockchains. Coinbase pools customers’ stakeable crypto assets, validates blockchain transactions through staking, and shares a portion of the rewards with customers whose assets were part of the pool. However, the SEC alleges that Coinbase failed to register these offerings and sales as required by law.
Gary Gensler, Chair of the SEC, expressed concern over Coinbase’s alleged misconduct, emphasizing that the company had disregarded essential rules and deprived investors of crucial protections. Gensler emphasized that in traditional securities markets, the functions performed by Coinbase are distinct and subject to separate regulatory oversight. The failure to comply with registration requirements, in his view, exposed investors to fraud, manipulation, and inadequate disclosure.
The SEC’s Director of Enforcement, Gurbir S. Grewal, echoed Gensler’s sentiments, stating that Coinbase had knowingly disregarded federal securities laws and made calculated decisions that benefitted the company while depriving investors of their entitled protections. Grewal stressed the importance of accountability for Coinbase’s actions, noting the consequences they have had for the investing public.
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, accuses Coinbase and CGI of violating registration provisions outlined in the Securities Exchange Act of 1934. Coinbase is additionally charged with violating the securities offering registration provisions of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains, penalties, and other equitable measures.
The SEC’s investigation involved the efforts of its Crypto Assets and Cyber Unit, with contributions from state securities regulators from California, Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin. Coinbase’s litigation will be overseen by experienced SEC attorneys.
Coinbase has yet to respond publicly to the charges brought against the company by the SEC. The outcome of the case will have significant implications for the regulation of the cryptocurrency industry and the responsibilities of digital asset exchanges.