Coinbase charged with operating as unregistered securities exchange
Less than 24 hours after charging one Bermudian-linked fintech company, the US Securities and Exchange Commission has filed against a second.
The SEC charged Coinbase Inc yesterday with operating its crypto asset trading platform 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 programme.
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 has :
• Provided a marketplace and brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact
• Engaged in the business of effecting securities transactions for the accounts of Coinbase customers
• Provided facilities for comparison of data respecting the terms of settlement of crypto asset securities transactions, served as an intermediary in settling transactions in crypto asset securities by Coinbase customers, and acted 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, record-keeping requirements, and safeguards against conflicts of interest, among others.
The SEC’s complaint also alleges that Coinbase’s holding company, Coinbase Global Inc, is a control person of Coinbase and is thus also liable for certain of Coinbase’s violations.
The SEC alleges that, since 2019, Coinbase has been engaging in an unregistered securities offering through its staking-as-a-service programme, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts.
Through this staking programme, 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 programme as required by law.
SEC chair Gary Gensler said: “We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer and clearinghouse functions.
“In other parts of our securities markets, these functions are separate. Coinbase’s alleged failures deprive investors of critical protections, including rule books 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 programme as required by the securities laws, again depriving investors of critical disclosure and other protections.”
Gurbir S. Grewal, director of the SEC’s Division of Enforcement said: “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.
“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.”
The SEC’s complaint, filed in US District Court for the Southern District of New York, alleges that Coinbase and CGI violated certain registration provisions of the Securities Exchange Act of 1934, and that it also 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.
Coinbase’s International Exchange is licensed by the Bermuda Monetary Authority and holds a Class F digital assets business licence under the Digital Assets Business Act 2018.
Meanwhile, Paul Grewal, Coinbase’s chief legal officer, will testify before the committee on Agriculture on June 7. He is expected to argue the need for amenable, clear-cut regulations in the US.
He will also offer an opinion on the recently proposed draft Bill, Digital Asset Market Structure, floated by the House Agriculture Committee chairman G.T. Thompson and Financial Services Committee chair, Patrick McHenry.
Coinbase, which was trading down $16 at one point, finished the day, off by $7.10, down 12.09%.