SEC Charges Coinbase for Operating as an Unregistered Securities Exchange, Broker, and Clearing Agency

The Securities and Exchange Commission (SEC) has taken legal action against Coinbase, Inc., accusing the company of operating its crypto asset trading platform without the necessary registrations as a national securities exchange, broker, and clearing agency. Additionally, Coinbase is charged with failure to register its crypto asset staking-as-a-service program for offer and sale.

According to the SEC’s complaint, Coinbase has allegedly facilitated the buying and selling of crypto asset securities, amounting to billions of dollars since at least 2019, in violation of the law. The complaint asserts that Coinbase has combined the functions of an exchange, broker, and clearing agency without obtaining the required registrations from the Commission. The company’s alleged unregistered services include:

1. Providing a marketplace that brings together buyers and sellers of securities through established, non-discretionary methods of order interaction.
2. Engaging in securities transactions for Coinbase customers’ accounts.
3. Offering facilities for comparing settlement data of crypto asset securities transactions, acting as an intermediary for settlement transactions, and serving as a securities depository.

The SEC claims that Coinbase’s failure to register has left investors without vital protections, such as SEC oversight, mandatory recordkeeping, and safeguards against conflicts of interest.

The complaint also implicates Coinbase Global Inc. (CGI), the holding company of Coinbase, as a control person liable for certain violations committed by Coinbase.

Furthermore, the SEC alleges that Coinbase has conducted an unregistered securities offering through its staking-as-a-service program. This program enables customers to earn profits from the “proof of stake” mechanisms of specific blockchains. Coinbase pools customers’ stakeable crypto assets, validates blockchain transactions through staking, and distributes a portion of the rewards to participating customers. Coinbase failed to register this staking program as required by law.

SEC Chair Gary Gensler emphasized that Coinbase’s alleged actions have commingled and unlawfully combined exchange, broker-dealer, and clearinghouse functions, disregarding the separation observed in other parts of the securities markets. The consequences, according to Gensler, are detrimental to investors, depriving them of essential protections against fraud, manipulation, and inadequate disclosure.

Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, expressed that Coinbase knowingly ignored the applicability of federal securities laws to its business activities, making calculated decisions that benefited the company financially but harmed investors by depriving them of their entitled protections.

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

The SEC’s investigation involved the efforts of the Crypto Assets and Cyber Unit, led by Serafima McTigue, Erin E. Wilk, Amy Mayer, Joy Guo, Elizabeth Goody, and Derek Kleinmann, with support from Ellen Chen of the San Francisco Regional Office. The unit was supervised by Steven Buchholz, Jorge G. Tenreiro, David Hirsch, Danielle Voorhees, Nicholas Heinke, and Jason Burt. Litigation will be conducted by Nick Margida, Peter Mancuso, and Ben Kuruvilla, under the supervision of Ladan Stewart, Jorge G. Tenreiro, and Olivia Choe.

The SEC acknowledges the collaborative efforts of a multi-state task force led by California and consisting of securities regulators from Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin in assisting with the case.