Coinbase Faces SEC Lawsuit & State Regulators: Staking Products, Securities, and the Future

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Coinbase, a popular cryptocurrency exchange, has been targeted by state security regulators concurrent to an SEC lawsuit. According to a statement published by the Alabama Securities Commission on June 6, a multi-state task force comprising of state regulators from several states, including California, Illinois, and Washington, have issued a Show Cause Order against Coinbase. The order alleges that “Coinbase violates the securities law by offering its staking rewards program accounts to Alabama residents without a registration to offer or sell these securities.”

In particular, the order gives Coinbase 28 days to show cause why they should not be directed to cease and desist from selling unregistered securities in Alabama. On the same day, Coinbase received a lawsuit notice from the U.S. Securities and Exchange Commission alleging the offering of unregistered securities.

The SEC lawsuit alleges that Coinbase operates as an unregistered securities exchange, broker, and clearing agency. Several tokens offered by the exchange, including Solana (SOL), Cardano (ADA), and Polygon (MATIC), qualify as securities.

The main conflict in this situation arises from whether Coinbase should have registered these offerings as securities or not. The crypto exchange has fought this notion, claiming that its staking products do not qualify as securities. This comes despite a previous incident where Kraken, another cryptocurrency exchange, settled with the SEC and wound down its staking services in the United States.

SEC Chair Gary Gensler shed light on the situation, stating that Coinbase allegedly deprived its customers of critical protections that prevent fraud and manipulation and avoided proper disclosure and safeguards against conflicts of interest. In response, Gurbir Grewal, director of the SEC’s Division of Enforcement, said that Coinbase was fully aware of the applicability of the federal securities laws to its business activities but deliberately refused to follow them.

This news has caused Coinbase’s share price to drop 15% in pre-trading following the announcement of the SEC lawsuit on June 6. The crypto community has questioned how Coinbase was allowed to go public in 2021 if it operated as an unregistered security broker. This ongoing debate could potentially impact other cryptocurrency exchanges and businesses considering going public.

Source: Cointelegraph

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