SEC Charges Coinbase with Securities Violations 24 Hours After Doing the Same with Binance

Only a day after charging Binance with a litany of securities violations, the SEC has now announced that it intends on holding Coinbase to task as well.

In a June 6th press release, the SEC states that is has,

“…charged Coinbase, Inc. 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 program.”

It should be noted that these charges are not surprising.  Coinbase was served with a Wells Notice weeks ago, and the SEC has already come to settlements with similar platforms like Kraken over staking services.

The Allegations and Tokens of Concern

As stated, the allegations made by the SEC surround its belief that Coinbase has been operating as an unregistered securities exchange, broker, and clearing agency.  Much of this surrounds the offering of its popular staking service.  Here the SEC believes that the staking program “…as it applies to each of the five stakeable crypto assets is a security”, and was heavily promoted by Coinbase – resulting in revenue topping $275M in 2022.

On twitter, SEC Chair Gary Gensler addressed the allegations and what it believed the purported failures of Coinbase meant for investors.

Source: Twitter @GaryGensler

The SEC also doubled-down on its classification of certain assets as securities.  These include, but are not limited to, projects such as,

• Cardano (ADA)
• Polygon (MATIC)
• Filecoin (FIL)
• Sandbox (SAND)
• Axie Infinity (AXS)

It should be noted that the majority of these projects are ones which have a ‘foundation' or central controlling body tasked with overseeing growth – a key point that Chair Gensler has repeatedly stated will result in a token being classified as a security.

SEC Commentary

In its statement, various representatives of the SEC took the time to share opinions on the charges.

Gary Gensler, Chair of the SEC, states,

““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 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.”

Meanwhile, Gurbir S. Grewal, Director of the SEC's Division of Enforcement, states,

“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.”

ASC Issues ‘Show Cause Order'

In addition to the SEC charging Coinbase with various securities violations, the Alabama Securities Commission has issued what is known as a ‘Show Cause Order' to the exchange.  The ASC states that, “The order gives Coinbase 28 days to show cause why they should not be directed to cease and desist from selling unregistered securities in Alabama.”

It should be noted that while this order was issued by the ASC, it was done so on behalf of various state regulators, including those from,

• Alabama
• California
• Illinois
• Kentucky
• Maryland
• New Jersey
• South Carolina
• Vermont
• Washington
• Wisconsin

While Coinbase must prove why it should be able to continue offering its services, the ASC does clarify that the “…action does bot prohibit Coinbase from offering staking as a service, so long as it complies with Alabama's laws.”

Much of the confusion surrounding staking programs stem from differing perspectives.  Securities regulators are approaching such services as offering investors a return on investment, making the service subject to securities laws, while platforms like Coinbase have the perspective that rewards given to participants are not a return on investment, but rather compensation for securing the network.

Final Word

As previously stated, the charges put forth by the SEC today against Coinbase have been expected for some time now.  Since receiving its Wells Notice weeks ago, Coinbase has gone on the offensive, attempting to sway public opinion in its favour, while no doubt preparing for this day.

Needless to say, it is beginning to look like the latter half of 2023 will be tumultuous in nature for Centralized Exchanges and projects utilizing a ‘proof-of-stake' consensus mechanism.