Round One: Unregistered Services Spark Legal Battle
Coinbase, a leading cryptocurrency trading platform, is facing a legal showdown as the Securities and Exchange Commission (SEC) levels charges of operating unregistered national securities exchange, broker, and clearing agency services. The SEC also has its crosshairs trained on Coinbase’s staking-as-a-service program.
The volley of charges follows the issuance of a Wells notice to Coinbase in April, signaling the SEC’s intent to enforce against the company.
The Battle Lines: Unregistered Crypto Asset Securities
According to the SEC, Coinbase has allegedly been operating outside of the law since at least 2019, generating billions through the facilitation of crypto asset securities transactions.
The SEC alleges that Coinbase interwove the functions of an exchange, broker, and clearing agency, bypassing the necessary registration process.
Without proper registration, the SEC asserts, Coinbase has “deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest” such as SEC inspection, strict recordkeeping, and safeguards against conflicts of interest.
“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions” noted SEC Chair Gary Gensler. He added that the alleged non-compliance deprived investors of key protections such as fraud prevention, proper disclosure, safeguards against conflicts of interest, and routine SEC inspection.
Staking-as-a-Service: A Regulatory Red Flag
In addition to its core charges, the SEC alleged that Coinbase neglected to legally register its staking-as-a-service program, wherein investors commit their crypto tokens to support blockchain operations over a set period and earn passive income without selling.
Staking has recently fallen under regulatory scrutiny, with another crypto exchange, Kraken, discontinuing its staking program in February and settling with the SEC for a $30 million penalty. The SEC’s lawsuit against Coinbase follows numerous charges against other crypto players, including Binance and Nexo.
Director of the SEC’s Division of Enforcement, Gurbir S. Grewal, emphasized that “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”.
Coinbase’s Response: Calls for Clearer Legislation
In response to the charges, Coinbase’s Chief Legal Officer and General Counsel, Paul Grewal, reiterated the company’s commitment to compliance and lamented the SEC’s ‘enforcement-only approach’ in the absence of clear rules for the digital asset industry.
Grewal called for transparent, equal legislation as a solution, not litigation. Meanwhile, he assured that Coinbase will “continue to operate [their] business as usual.”
Legislative Developments: Crypto on Capitol Hill
Calls for clearer legislation are being echoed throughout the crypto world, with recent efforts from Republican lawmakers offering a ray of hope. On Monday, a draft legislation outlining a regulatory plan for digital assets was released, proposing authority sharing over crypto between the Commodity Futures Trading Commission and SEC.
This draft joins the ranks of other crypto-related bills introduced this year, however, it is touted as the most comprehensive piece of crypto legislation thus far.
The Aftermath: Coinbase CEO Weighs In
Coinbase’s CEO, Brian Armstrong, took to Twitter to express pride in representing the industry in court to bring clarity to crypto rules. Armstrong criticized the SEC for its regulation by enforcement approach and expressed confidence in Coinbase’s stance.
The company stated that it does not list any securities, thereby emphasizing the uniqueness of the SEC’s complaint against Coinbase. He expressed confidence that “America will get this right in the end” and encouraged the industry to keep moving forward.
