On June 6, the U.S. Securities and Exchange Commission (SEC) filed suit against Coinbase, alleging that the company had violated securities regulations.
Here are the most notable takeaways from that cost.
1. Coinbase operated as an unregistered broker
The SEC said Coinbase’s main trading platform has been operating as an unregistered broker, exchange and clearing house since 2019. It also said the company’s Prime and Wallet services have been operating as unregistered brokers since then.
Coinbase profits are also boosted in the case. The SEC said Coinbase earned billions of dollars in revenue from transaction fees and alleged that Coinbase prioritized its own revenue over investor interest and legal compliance.
2. Case text mainly concerns third-party advertisements
The SEC said Coinbase provided access to existing crypto asset securities. It said this puts Coinbase “squarely within the purview of securities laws.”
Those tokens are Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axie Infinity (AXS), Chiliz (CHZ), FLOW (FLOW), Internet Computer Protocol (ICP ), Near Protocol (NEAR), Voyager (VGX), Dash (DASH), and Nexo (NEXO).
More than 40 pages of the 101-page submission are intended to prove that those tokens are securities. Those pages make little mention of Coinbase other than the fact that it mentioned the above tokens, meaning Coinbase’s behavior is not alone in play in the matter.
3. Stakeout services are a security offering
The SEC said Coinbase’s staking service constitutes an unregistered sale and offering of securities in itself. Coinbase marketed its staking service as an investment opportunity, capitalizing on the service, giving users profit expectations and further meeting the conditions necessary for the offer to be considered a certainty.
Coinbase began expecting the SEC to target its staking offer in early 2023 and changed its staking model in March. The SEC acknowledged that change by citing a pertinent filing, but declined to comment further.
4. Coinbase’s Crypto Rating Council failed
While Coinbase has been operating since 2012, the SEC case text considers Coinbase’s activity since 2019 as the “relevant period” for its allegations.
This period seems relevant as Coinbase has massively expanded its listings from 2019; it has roughly doubled its quotes by the end of 2020.
Those listings were powered by the launch of the Coinbase-led Crypto Rating Council (CRC) in 2019. Coinbase used the CRC framework to determine which cryptocurrencies were suitable for listing. It also used this information to take precautions and even asked a potential IPO to review the “securities-related” language.
However, the SEC said these actions show that Coinbase was listing coins it knew had securities. As such, his attempts at compliance failed.
5. Coinbase’s listing doesn’t help
The SEC noted that it has approved a public stock offering from Coinbase’s parent company, CGI. The company’s shares began trading as COIN on April 14, 2021.
Coinbase executives have repeatedly said that this successful listing is a sign of SEC approval – including one recent tweet in which CEO Brian Armstrong says the SEC has “reviewed our company and allowed us to go public in 2021.”
The SEC countered, saying that approval of a stock offering is not “an opinion or endorsement of the legality of an issuer’s underlying business.” In addition, it said CGI acknowledged securities-related risks in its past stock returns.
6. The charges are only partially similar to Binance’s case
The SEC charges against Coinbase are in some ways similar to the charges against Binance. The regulator similarly accused Binance of failing to register. The complaint also contained large sections about listings of third-party cryptocurrencies.
However, the SEC also alleged that Binance and its US counterparts allowed users to circumvent geo-blocking, engaged in fraud, allowed wash trading, and failed to separate US and global operations. The SEC has made no equivalent allegations against Coinbase.
The SEC has also directly charged Changpeng Zhao, CEO of Binance, and designated him as the defendant. It has not charged any Coinbase executive in the relevant case.
7. SEC wants injunctions and fines
The SEC said it wants Coinbase and its members to be ordered (or prevented) from violating the Securities Act and Exchange Act.
The regulator also said it wants Coinbase to be ordered to release its ill-gotten gains and pay civil fines; it also left room to ask for further relief. There was no mention of how much Coinbase could be paid in fines and remission.
It is unclear how these fees and requirements will affect Coinbase’s day-to-day operations. Coinbase has repeatedly stated that it intends to fight the SEC in court.
