Coinbase Faces SEC Action

According to a statement issued by the Alabama Securities Commission on June 6, a multistate task force comprised of state regulators from Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin has issued a Show Cause Order against the cryptocurrency exchange Coinbase.

The order asserts that “Coinbase violates the securities law by offering its staking rewards program accounts to Alabama residents without registration to offer or sell these securities.”

In particular, Coinbase is given 28 days to demonstrate why it should not be ordered to cease selling unregistered securities in Alabama.

The United States Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase on the same day, alleging the sale of unregistered securities.

Coinbase’s nearly 3.5 million national staking rewards program accounts “are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC).” According to regulators:

“Coinbase takes a cut of those [staking] profits before sharing them with investors. The ASC [Alabama Securities Commission] action does not prohibit Coinbase from offering staking as a service, so long as it complies with Alabama’s laws.”

As a consequence, regulators assert that “none of these accounts, including the more than 33,000 accounts currently held by Alabama investors, are protected against loss.”

“Investors are encouraged to contact ASC to confirm the registration status of a staking rewards program before investing their money.”

Simultaneously, the SEC lawsuit alleged that Coinbase never registered as a broker, national securities exchange, or clearing agency, thereby circumventing the disclosure scheme for securities markets.

Gary Gensler, chairman of the Securities and Exchange Commission, stated, in response to the most recent Coinbase lawsuit, that the cryptocurrency exchange deprived its customers of vital protections against fraud and manipulation.

Kraken, another cryptocurrency exchange, previously reached a $30 million settlement with the SEC regarding its U.S. crypto staking program.

A second SEC lawsuit against the cryptocurrency exchange Binance is currently pending.