SEC Slams Coinbase with Unregistered Operations Charges

1. SEC charges Coinbase for operating as an unregistered securities exchange, broker, and clearing agency since 2019.
2. Coinbase also faces charges for its unregistered staking-as-a-service program, which allegedly offers and sells securities.
3. The SEC’s complaint seeks injunctive relief, disgorgement of ill-gotten gains, penalties, and other equitable relief.

In a seismic move that has sent shockwaves through the crypto industry, the Securities and Exchange Commission (SEC) has charged Coinbase, a prominent crypto trading platform, for operating as an unregistered national securities exchange, broker, and clearing agency.

The commission alleges that Coinbase has interwoven the conventional services of an exchange, broker, and clearing agency without the necessary registration, unlawfully facilitating billions of dollars in crypto asset securities transactions since 2019.

The SEC further alleges that Coinbase has been conducting unregistered security offerings through its staking-as-a-service program since 2019. The program purportedly allows customers to profit from the “proof of stake” mechanisms of certain blockchains, a process wherein Coinbase pools customer assets, stakes them to perform transaction validation services, and allocates a portion of the rewards to its customers.

The alleged failure to register, as per the SEC, has deprived investors of vital protections, including SEC inspections, record-keeping requirements, and safeguards against conflicts of interest. The commission also argues that Coinbase’s holding company, Coinbase Global Inc. (CGI), is liable for some of Coinbase’s violations.

In response to the allegations, SEC Chair Gary Gensler stated,

Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” stressing that these functions are separate in other parts of the securities markets.

Moreover, the Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, emphasized that companies cannot disregard the rules merely because they would prefer different ones.

The SEC has lodged a complaint in the U.S. District Court for the Southern District of New York, claiming violations of certain registration provisions of the Securities Exchange Act of 1934 and the Securities Act of 1933 by Coinbase and CGI. The SEC is seeking injunctive relief, disgorgement of allegedly ill-gotten gains plus interest, penalties, and other equitable relief.

Despite these charges, the future remains bright for Coinbase in the crypto space. The platform has displayed resilience in the past and can use this challenge as an opportunity to further enhance its compliance procedures and refine its business model.

Notably, it’s imperative to remember that this is part of the broader dialogue between the crypto industry and regulatory bodies, aimed at establishing clear guidelines for the operation of digital asset platforms. As such, the outcome of this case could have significant implications for the entire crypto industry, potentially leading to greater clarity and security for investors.