Coinbase Charged for Operating as an Unregistered Securities Exchange

The U.S. Securities and Exchange Commission (SEC) announced today it has charged Coinbase for operating as an unregistered securities exchange, broker, and clearing agency; and for failing to register the offer and sale of its crypto asset staking-as-a-service program.

Specifically, the SEC is alleging that Coinbase:

  • 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
  • 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

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler. “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.”

Coinbase Chief Legal Officer Paul Grewal, who testified yesterday before the House Committee on Agricultural Services on the new Digital Asset Market Structure Discussion Draft, said in a blog post that U.S. crypto firms are lacking clear rules for operating in the crypto space. In fact, Coinbase has been asking regulators for months to work together to help build regulation around crypto. The fintech has been straightforward that it wants to operate within regulation, but the SEC hasn’t been willing to work with Coinbase to define regulations.

Much of the issue between the two parties hinges on a lack of definition. Coinbase insists that it does not list securities on its platform, while the SEC has called out 61 cryptocurrencies that it believes are securities.

All of this back-and-forth has made two things clear. First, as Coinbase CEO Brian Armstrong explains in a TV commercial, crypto in the U.S. has valuable use cases, and companies need clear rules to operate in the space:

Second, regulators are making it very difficult for U.S. companies to facilitate crypto transfers. Today’s news comes a day after the SEC sued Binance CEO and Founder Changpeng Zhao for operating unregistered exchanges, broker-dealers, and clearing agencies; misrepresenting trading controls and oversight on the Binance.US platform; and for the unregistered offer and sale of securities.

In a tweet earlier today, Armstrong highlighted that the SEC’s suit against Binance is different from its suit against Coinbase. “Btw, in case it’s not obvious, the Coinbase suit is very different from others out there – the complaint filed against us is exclusively focused on what is or is not a security. And we are confident in our facts and the law,” he said.

Regardless of the differences, in my view, the SEC is making examples out of these crypto firms to not only serve as a warning to other companies operating in the crypto space, but to also drive down consumer interest in holding digital assets.

Armstrong also used Twitter to reinforce what his company has been saying for months. “Regarding the SEC complaint against us today, we’re proud to represent the industry in court to finally get some clarity around crypto rules,” he said. “Remember:

  1. The SEC reviewed our business and allowed us to become a public company in 2021.
  2. There is no path to come in and register – we tried, repeatedly – so we don’t list securities. We reject the vast majority of assets we review.
  3. The SEC and CFTC have made conflicting statements, and don’t even agree on what is a security and what is a commodity.
  4. This is why the US congress is introducing new legislation to fix the situation, and the rest of the world is moving to put clear rules in place to support this technology.

Instead of publishing a clear rule book, the SEC has taken a regulation by enforcement approach that is harming America. So if we need to avail ourselves of the courts to get clarity, so be it.”