The SEC alleges that the renowned digital asset exchange has been operating its crypto trading platform without the necessary registration, while also failing to register its crypto asset staking-as-a-service program.
The crypto giant’s legal imbroglio spells out a stern message to others in the industry, painting a picture of increased scrutiny and regulation in the era of digital assets.
The allegations against Coinbase
Accusations leveled against the company center around the firm’s alleged operations as an unregistered national securities exchange, broker, and clearing agency since 2019.
The SEC asserts that the company has amassed billions of dollars via unauthorized activities related to the trade of crypto securities. The intricate meshing of functions – typically distinct in traditional finance – without legal registration, lies at the heart of the SEC’s allegations against Coinbase.
The services provided by Coinbase, as per the SEC’s complaint, include a marketplace bringing together multiple buyers and sellers of securities, execution of securities transactions for customers’ accounts, and the provision of data comparison facilities relating to crypto asset securities transactions.
The SEC asserts that Coinbase has failed to register these functions, thereby denying investors key protections including regular inspections, stringent record-keeping, and robust safeguards against potential conflicts of interest.
Furthermore, the SEC has extended its allegations to include Coinbase Global Inc. (CGI) as a control person. The complaint claims that CGI is accountable for some of the company’s infringements.
Staking-as-a-service program controversy
Coinbase’s staking-as-a-service program also falls under the SEC’s scrutiny, with the regulatory agency suggesting that the company has been involved in an unregistered securities offering since 2019.
The staking program allows users to profit from proof of stake blockchain mechanisms and Coinbase’s efforts. It’s alleged that the company pools customer assets, stakes them to perform transaction validation services, and then shares the generated rewards with its clients.
The SEC’s argument posits that Coinbase neglected to register its offers and sales of this staking program, hence violating federal laws.
SEC Chair, Gary Gensler, pointed out that the actions of Coinbase deprived investors of critical safeguards, including those meant to prevent fraud and manipulation, adequate disclosures, and routine SEC inspections.
The SEC’s actions against Coinbase are not just a revelation but also a stern warning to other crypto entities about their operations and regulatory compliance.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, underscored that the rules can’t be ignored due to personal preferences or disdain.
Coinbase’s deliberate neglect of these laws, he says, might have led to its billion-dollar earnings but at the detriment of investor protections.
The lawsuit has been lodged in the U.S. District Court for the Southern District of New York. The SEC accuses both Coinbase and CGI of violating certain registration provisions of the Securities Exchange Act of 1934 and alleges that it contravened the securities offering registration provisions of the Securities Act of 1933.
The regulatory agency is seeking a range of reliefs including injunctions, the return of wrongfully acquired gains plus interest, penalties, and other equitable measures.
The SEC’s charges against Coinbase immediately after targeting Binance serve as a chilling reminder that they’re really not on crypto’s side.