According to a press release from the United States Securities and Exchange Commission on June 6th, 2023, the largest North American crypto exchange, Coinbase, is now being charged with “operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency."
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, 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. (CGI), is a control person of Coinbase and is thus also liable for certain of Coinbase’s violations.
The SEC also took aim at Coinbase’s “Staking-as-a-Service Program” alleging that since 2019, the company has been engaging in an unregistered securities offering through its staking-as-a-service program, which allows customers to earn profits from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts. Through this staking program, 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 program as required by law.
“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. (Unregistered Offer and Sale of Securities in Connection with Staking-as-a-Service Program.)
In response to SEC’s allegations against Coinbase, the company's co-founder and CEO Brian Armstrong took to Twitter with some interesting points to consider:
“Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules."
Remember:
1. The SEC reviewed our business and allowed us to become a public company in 2021.
2. There is no path to "come in and register" - we tried, repeatedly - so we don't list securities. We reject the vast majority of assets we review.
3. The SEC and CFTC have made conflicting statements, and don't even agree on what is a security and what is a commodity.
4. This is why the US congress is introducing new legislation to fix the situation, and the rest of the world is moving to put clear rules in place to support this technology.
Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.
Btw, in case it’s not obvious, the Coinbase suit is very different from others out there – the complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law.
We'll get the job done. In the meantime, let's all keep moving forward and building as an industry. America will get this right in the end.” (https://twitter.com/brian_armstrong/status/1666129111025324035)
Once again, we will have to see what comes after the smoke has cleared. For now, it appears that the fire is just getting started.