According to the regulator, the company illegally traded securities and offered its customers staking without registration.
The US Securities and Exchange Commission (SEC) has accused cryptocurrency exchange Coinbase of operating as an unregistered broker, exchange and clearing house. Additionally, the SEC alleges that Coinbase was conducting an unregistered offering and sale of securities as part of its staking program.
Since 2019, Coinbase has made billions of dollars illegally facilitating the buying and selling of crypto assets, which are securities, according to the SEC. The SEC alleges that Coinbase is mixing traditional exchange, broker, and clearing house services without proper registration with the Commission, as required by law. Through these unregistered services, Coinbase allegedly:
Provides a market for and aggregates securities orders from multiple buyers and sellers using established, non-discretionary methods whereby such orders interact;
Engaged in the business of executing securities transactions at the expense of Coinbase customer accounts;
Provides a means to compare data regarding the settlement terms of crypto-asset securities transactions, act as an intermediary in the settlement of Coinbase clients' crypto-asset securities transactions, and act as a securities depository.
The SEC complaint alleges that Coinbase's refusal to register deprived investors of significant safeguards, including SEC due diligence, record keeping requirements, and conflict of interest protection.
The SEC complaint also contains allegations against Coinbase's holding company, Coinbase Global Inc. (CGI), which is the controlling entity of Coinbase and thus also responsible for some of Coinbase's violations.
In addition, the SEC alleges that since 2019, Coinbase has been engaging in an unregistered offering and sale of securities as part of its staking program, which allows customers to profit from the “proof of stake” mechanisms of certain blockchains and Coinbase’s efforts. Under this staking program, Coinbase allegedly aggregates each type of customer crypto assets that can be used for staking, stakes them 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 has not registered its offerings and sales of this staking program as required by law.
“We allege that Coinbase, despite being subject to securities laws, mixes and illegally offers exchange, broker, and clearing house services,” SEC Chairman Gary Gensler said in a statement.
Coinbase CEO Brian Armstrong stated in a tweet on Tuesday that the company is “proud to represent the industry in court to finally get clarity around crypto regulations.” But he also expressed dissatisfaction with the actions of the SEC, which, according to him, approved the crypto platform business when it allowed Coinbase to go public in 2021. “There is no way to “come and register” - we tried, repeatedly,” he wrote. “Instead of publishing clear rules of the game, the SEC has adopted a regulatory-by-enforcement approach that harms America. So if we have to use the courts to get clarity, then so be it.”
In a statement to CNN, Coinbase General Counsel Paul Grewal echoed Armstrong's statement and added, "The solution is legislation that allows fair traffic rules to be developed transparently and enforced equally, not litigation."
Coinbase shares plunged 21% at the opening of trading on Tuesday to $46.45 a share.
The lawsuit against Coinbase follows a similar lawsuit against its overseas competitor Binance. Within two days, the SEC sued two cryptocurrency exchanges at once - Binance and Coinbase. They are accused of trading in unregistered securities and operating without registration.