SEC Tackles Coinbase Next

Posted on 06/06/2023

Hot on the heels of SEC’s case against Binance, a new investigation and set of accusations have been revealed. According to the SEC’s latest complaint, Coinbase has allegedly made billions of dollars by buying and selling crypto assets unlawfully.

Per the SEC: “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, recordkeeping 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 alleges that, “Since 2019, Coinbase 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.”

SEC Chair Gary Gensler personally commented on this investigation as he did with Binance: “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.”

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, also weighed in: “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.”

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Coinbase and CGI violated certain registration provisions of the Securities Exchange Act of 1934 and that Coinbase violated the securities offering registration provisions of the Securities Act of 1933. The complaint seeks injunctive relief, disgorgement of supposedly ill-gotten gains plus interest, penalties, and other equitable relief.

Investigators and Litigators

The SEC’s investigation was conducted by Serafima McTigue, Erin E. Wilk, Amy Mayer, Joy Guo, Elizabeth Goody, and Derek Kleinmann of the Division of Enforcement’s Crypto Assets and Cyber Unit, with the assistance of Ellen Chen of the San Francisco Regional Office. It was supervised by Steven Buchholz, Jorge G. Tenreiro, and David Hirsch of the Crypto Assets and Cyber Unit, as well as Danielle Voorhees, Nicholas Heinke, and Jason Burt of the Denver Regional Office. The SEC’s litigation will be conducted by Nick Margida, Peter Mancuso, and Ben Kuruvilla and supervised by Ladan Stewart, Jorge G. Tenreiro, and Olivia Choe.

The SEC received the assistance of ten state securities regulators including California, Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.

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