SEC sues Coinbase for illegally operating as unregistered securities exchange, one day after suing Binance

Just less than 24 hours after the U.S. Securities and Exchange Commission (SEC) charged Binance and its founder CZ with securities law violations, the US regulator is now coming after the second largest crypto exchange “with operating its crypto asset trading platform as an unregistered national securities exchange.”

The SEC now sued Coinbase, alleging the exchange has for many years broken its rules by allowing users to trade cryptocurrencies on its platform that are unregistered securities.

The news comes less than a month after a research report from Berenberg hinted that the SEC was close to bringing an enforcement action against Coinbase and that the action would likely mirror those that the regulator brought against rival crypto exchanges Bittrex and Kraken.

Calling it a “Wild West” of investing, SEC Chair Gary Gensler told CNBC in an interview that “the crypto markets are undermining that trust, and I would say this: it undermines our overall capital markets.”

In a post on Twitter this morning, the SEC wrote, “Today we charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.”

Today we charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.https://t.co/XPG2gDkxtV pic.twitter.com/hCdVMw8B2v

— U.S. Securities and Exchange Commission (@SECGov) June 6, 2023

In addition, “the SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program,” the agency said in a statement on its website.

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 having registered 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 also liable for certain of Coinbase’s violations. You can read the rest of the complaint below.

Unregistered Offer and Sale of Securities in Connection with Staking-as-a-Service Program

According to the Securities and Exchange Commission (SEC), Coinbase has been accused of participating in an unregistered securities offering since 2019. This offering is related to their staking-as-a-service program, which enables customers to earn profits from the “proof of stake” mechanisms of specific blockchains, as well as Coinbase’s own efforts.

Essentially, through this program, Coinbase allegedly combines the stakeable crypto assets of its customers into a pool, uses the pool to perform blockchain transaction validation services, and shares a portion of the rewards generated from this work with the customers whose assets were included in the pool. The issue at hand is that Coinbase did not fulfill its legal obligation to register the offers and sales of this staking program.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler. “In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rulebooks that prevent fraud and manipulation, proper disclosure, safeguards against conflicts of interest, and routine inspection by the SEC. Further, as we allege, Coinbase never registered its staking-as-a-service program as required by the securities laws, again depriving investors of critical disclosure and other protections.”

“You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”