The Securities and Exchange Commission (SEC) has charged Coinbase, the largest cryptocurrency exchange in the United States, with operating an illegal trading platform that offered unregistered crypto asset securities. Additionally, the securities watchdog accused the platform of running a digital asset staking-as-a-service programme without authorization.

Today we charged Coinbase, Inc. with operating its crypto asset trading platform as an unregistered national securities exchange, broker, and clearing agency and for failing to register the offer and sale of its crypto asset staking-as-a-service program.https://t.co/XPG2gDkxtVpic.twitter.com/hCdVMw8B2v

— U.S. Securities and Exchange Commission (@SECGov) June 6, 2023

SEC Cracks Down on Coinbase

In a complaint filed before a US district court in New York, the SEC further alleged that Coinbase combines the functions of an exchange, brokerage and clearing agency, which are separate under US laws, without registering to engage in these activities.

“All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk,” the SEC explained in its complaint.

The lawsuit against Coinbase comes a day after the regulator charged Binance, the world’s largest cryptocurrency exchange by trading volume, before a district court in Columbia for allegedly operating an illegal exchange, offering unregistered crypto asset securities to investors and commingling customers’ funds. Also, Coinbase received a Wells Notice from the regulator in late March, notifying the Nasdaq-listed crypto exchange that it has been violating the US securities law by offering unregistered crypto asset securities.

More Allegations

In its complaint, the SEC alleged that Coinbase since at least 2019 has been offering unregistered securities through its staking-as-a-service programme. Crypto staking involves participation in the validation of transactions on a blockchain that uses a proof-of-stake consensus mechanism in order to earn rewards.

Furthermore, the securities watchdog claimed since at least 2016 Coinbase had understood that a Supreme Court had determined that crypto assets are an investment contract subject to US securities laws. It added that the exchange has been offering crypto asset securities despite claiming for years that it was striving for compliance with the decision.

"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,” Gurbir Grewal, the Director of the SEC’s Division of Enforcement, said in a statement. “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.”

In the statement, the SEC said it is seeking injunctive relief, disgorgement of ill-gotten gains plus interest, penalties, and other equitable relief, from the case.

Coinbase Operates ‘Business as Usual’

Meanwhile, Paul Grewal, Coinbase’s Chief Legal Officer (CLO) and General Counsel, in a statement said the crypto exchange has demonstrated commitment to compliance. He accused the SEC of relying on 'an enforcement-only approach' without clear rules for the crypto industry.

In April, Coinbase sued the SEC for failing to respond to its July 2022 petition that asked the US securities watchdog to provide guidance for the cryptocurrency industry using its formal rulemaking process. The petition was filed in the same month when reports first emerged that the SEC was probing Coinbase over alleged unregistered crypto asset securities.

“The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation,” Grewal said, speaking on SEC’s new lawsuit. “In the meantime, we’ll continue to operate our business as usual.”

Over the last few months, the SEC has continued to crack down on cryptocurrency exchanges in the United States, arguing that their crypto offerings are unregistered securities. As a result, crypto firms, such as Kraken, Bittrex, Gemini and Genesis, have been at loggerheads with the regulator.

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