The Securities and Exchange Commission charged digital-asset exchange Coinbase Global Inc.
COIN,
with operating an unregistered national securities exchange, brokerage and clearing agency.
The SEC also charged the company for offering its crypto staking service without registering with the agency and for selling to the public crypto securities that had not been registered with the agency by their issuers.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” SEC Chairman Gary Gensler said in a statement.
“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,” he added.
Coinbase shares were down more than 13% in early trade.
“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” said Paul Grewal, chief legal officer and general counsel at Coinbase, in a statement.
“The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”
Offering unregistered securities
Federal law requires issuers of securities to register with the SEC and meet certain disclosure requirements so that investors understand what they are buying. At the heart of the SEC’s complaint against Coinbase, it lays out a non-exhaustive list of 13 crypto tokens that it asserts are securities, which Coinbase offered on its platform.
The definitions of a security is laid out in federal law and in numerous court cases, one of which is an “investment contract,” which exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.
The SEC alleges that the tokens offered on the following crypto networks meet this definition of an investment contract: Solana
SOLUSD,
Cardano
ADAUSD,
Polygon
MATICUSD,
Filecoin
FILUSD,
Sandbox
SANDUSD,
Axie Infinity
AXSUSD,
Chiliz
CHZUSD,
Flow
FLOWUSD,
Internet Computer Protocol
ICPUSD,
NEAR
NEARUSD,
Voyager , Dash
DASHUSD,
and Nexo .
The SEC’s complaint lays out analysis of why it believes these are securities, and because Coinbase offered them, the regulator alleges that it failed to register as a broker, who buys and sells securities on behalf of a client, an exchange, which brings together buyers and sellers of securities, and a clearing house that holds customer funds and settles transactions.
Seeking ‘exponential growth’
The SEC alleges that Coinbase has long had a sophisticated understanding of securities laws and what characteristics of a digital asset would qualify it as an investment contract, but that the company ignored this expertise in the pursuit of higher revenue.
Beginning in 2019, Coinbase partnered with other digital asset companies to found the Crypto Rating Council, which rated various cryptocurrencies on a scale from 1 to 5, according to how closely the asset resembled a security based on SEC guidance and U.S. case law.
The complaint argues, however, that following the founding of the council Coinbase more than doubled the number of crypto assets available on the platform, and more than doubled that number again in 2021.
“During this period, Coinbase made available on the Coinbase platform crypto assets with high risk scores under the CRC framework it had adopted,” the complaint reads.
“In other words, to realize exponential growth of the Coinbase platform and to boost its own trading profits, Coinbase made the strategic business decision to add crypto assets….even where it recognized the crypto assets had the characteristics of securities.”
Coinbase staking program
Blockchains like Ethereum
ETHUSD,
and Solana run on proof-of-stake mechanisms, used to confirm transactions whereby users will put up large sums of collateral in a competition to validate the next transaction and earn a reward.
Coinbase offers customers the chance to stake their crypto tokens through the company’s staking program, giving retail investors the ability to earn a share of staking rewards even if they don’t have the capital necessary to participate in the staking process on their own.
The company earned $275.5 million in revenue from its staking activities, according to public fillings, and the SEC alleges that this program is itself an unregistered investment contract because customers invest money with Coinbase, expecting a profit based on the company’s entrepreneurial efforts.
The SEC is seeking a trial by jury and for an order forcing the company to disgorge revenues derived by violations of the law as well as civil monetary penalties.
Read the full article here
