Coinbase faces SEC charges over unregistered operations

The Securities and Exchange Commission (SEC) has initiated a legal complaint against Coinbase, alleging that the cryptocurrency exchange has been operating without proper registrations.

Coinbase has been charged with running an unregistered securities exchange, broker, and clearing agency and is accused of failing to register its staking-as-a-service program.

Since 2019, Coinbase has reportedly generated billions of dollars through the facilitation of crypto asset securities transactions. However, the SEC claims that the platform has done so without obtaining the necessary legal registrations. Coinbase is alleged to have offered multiple services typically provided by a registered exchange, broker, and clearing agency, blending these functions and bypassing the required registrations.

The unregistered operations are said to have included serving as a marketplace for securities, effecting securities transactions for Coinbase customers, and acting as a securities depository. The SEC asserts that these activities without the required registration have denied investors significant protections, such as SEC inspection, recordkeeping requirements, and safeguards against conflicts of interest.

Coinbase Global Inc., the holding company for Coinbase, has also been named in the SEC complaint. As a controlling entity of Coinbase, CGI is held responsible for some of the alleged violations.

In addition, the SEC alleges that Coinbase has engaged in an unregistered securities offering via its staking-as-a-service program. This service enables customers to profit from the “proof of stake” mechanisms of certain blockchains. The company is said to have pooled customer assets for staking, performed blockchain transaction validation services, and distributed a share of the resulting rewards to customers. The SEC claims that Coinbase failed to register its offers and sales of this staking program as required by law.

SEC chair Gary Gensler commented that Coinbase’s alleged activities deprived investors of critical protections typically associated with registered entities. Gurbir Grewal, director of the SEC’s Division of Enforcement, added that the consequences of ignoring the rules are significant for the investing public.

The SEC complaint, filed in the Southern District of New York, accuses Coinbase and CGI of violating certain registration provisions of the Securities Exchange Act of 1934. It also alleges that Coinbase has breached the securities offering registration provisions of the Securities Act of 1933. The SEC is seeking injunctive relief, disgorgement of profits plus interest, penalties, and other equitable relief.

The SEC investigation was conducted with the support of a multi-state task force that includes ten state securities regulators led by California. Other participating states are Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.

[Image courtesy: Coinbase]

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