Coinbase Charged by SEC for Operating Unregistered Crypto Trading Platform and Staking Program

The Securities and Exchange Commission (SEC) has filed charges against Coinbase, Inc., a leading cryptocurrency exchange, for operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency. Additionally, Coinbase has been charged with failing to register its crypto asset staking-as-a-service program, a popular feature among its customers.

According to the SEC’s complaint, Coinbase has allegedly facilitated the buying and selling of crypto asset securities unlawfully, generating billions of dollars in revenue since at least 2019. The complaint asserts that Coinbase combines the functions of an exchange, broker, and clearing agency without having obtained the necessary registrations mandated by law. The SEC alleges that Coinbase engages in activities such as providing a marketplace for buyers and sellers, executing securities transactions, and acting as a securities depository.

By failing to register, Coinbase has deprived investors of significant protections that the SEC oversight provides, including inspection, recordkeeping requirements, and safeguards against conflicts of interest. The complaint also asserts that Coinbase Global Inc. (CGI), the holding company of Coinbase, is liable for certain violations as it controls Coinbase.

The SEC’s charges also extend to Coinbase’s staking-as-a-service program. Since 2019, Coinbase has allegedly conducted an unregistered securities offering through this program, allowing customers to earn profits by participating in the “proof of stake” mechanisms of specific blockchains. Under this program, Coinbase pools customers’ stakeable crypto assets, validates blockchain transactions, and shares a portion of the rewards with participating customers. However, Coinbase failed to register the offers and sales of this program, as required by securities laws.

SEC Chair Gary Gensler expressed concern over Coinbase’s alleged failures to comply with securities laws. He highlighted the importance of separate functions in securities markets and emphasized that Coinbase’s actions deprived investors of crucial protections against fraud, manipulation, and inadequate disclosure.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated that Coinbase knowingly disregarded the applicability of federal securities laws to its business activities. He asserted that Coinbase’s deliberate refusal to follow the rules allowed the company to amass significant profits at the expense of investors who were deprived of their entitled protections. The SEC’s enforcement action seeks injunctive relief, disgorgement of ill-gotten gains, penalties, and other equitable remedies.

The SEC’s investigation into Coinbase was conducted by the Division of Enforcement’s Crypto Assets and Cyber Unit. The litigation will be led by the SEC’s legal team supervised by various officials. The SEC acknowledged the assistance of a multi-state task force led by California and consisting of nine other state securities regulators in its investigation.

Coinbase’s legal challenges highlight the regulatory complexities surrounding the cryptocurrency industry as regulators strive to protect investors and maintain the integrity of the financial markets. The outcome of this case will likely have significant implications for the future regulation of cryptocurrency exchanges and related services.

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