Yesterday, the U.S. regulator SEC brought a lawsuit against the world’s largest crypto exchange, Binance, which included 13 charges. As a result, the lead currency Bitcoin (BTC), dropped to below $26,000. Today the SEC charged the largest U.S. crypto exchange, Coinbase, for operating as an unregistered national securities exchange, broker, and clearing agency. The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program.
Unregistered Exchange, Broker, and Clearing Agency
According to the SEC’s complaint, since at least 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without registering any of those functions with the Commission as required by law. Through these unregistered services, Coinbase allegedly:
- Provides a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact;
- Engages in the business of effecting securities transactions for the accounts of Coinbase customers; and
- Provides facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, serves as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acts as a securities depository.
As alleged in the SEC’s complaint, Coinbase’s failure to register has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.
The SEC’s complaint also alleges that Coinbase’s holding company, Coinbase Global Inc. (CGI), is a control person of Coinbase and is thus liable for certain of Coinbase’s violations.
Unregistered Offer and Sale of Securities in Connection with Staking-as-a-Service Program
THE SEC ALLEGES THAT, SINCE 2019, COINBASE HAS BEEN ENGAGING IN UNREGISTERED SECURITY OFFERINGS THROUGH ITS STAKING-AS-A-SERVICE PROGRAM, WHICH ALLOWS CUSTOMERS TO EARN PROFITS FROM THE “PROOF OF STAKE” MECHANISMS OF CERTAIN BLOCKCHAINS AND COINBASE’S EFFORTS. THROUGH THIS STAKING PROGRAM, COINBASE ALLEGEDLY POOLS EACH TYPE OF CUSTOMERS’ STAKEABLE CRYPTO ASSETS, STAKES THE POOL TO PERFORM BLOCKCHAIN TRANSACTION VALIDATION SERVICES, AND PROVIDES A PORTION OF THE REWARDS GENERATED FROM THIS WORK TO ITS CUSTOMERS WHOSE ASSETS WERE PART OF THE POOL. COINBASE FAILED TO REGISTER ITS OFFERS AND SALES OF THIS STAKING PROGRAM AS LAW REQUIRES.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,”
SEC CHAIR GARY GENSLER
The SEC’s complaint alleges that Coinbase and CGI violated certain registration provisions of the Securities Exchange Act of 1934 and that Coinbase violated the securities offering registration provisions of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief.