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Seven blasts from the SEC’s Coinbase suit

On June 6 the US Securities and Exchange Commission (SEC) charges filed against Coinbase, alleging that the company violated securities regulations.

These are the most notable takeaways from those charges.

1. Coinbase operates as an unregistered broker

The SEC said that Coinbase’s main trading platform has been operating as an unregistered broker, exchange and clearing agency since 2019. It also said that the company’s Prime and Wallet services have since then operated as unregistered brokers.

Coinbase’s profits have also increased in the case. The SEC said that 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 primarily related to third party listings

The SEC said that Coinbase provides access to existing crypto asset securities. It said this brings Coinbase “fully within the purview of the securities laws.”

Those tokens are Solana (SOL), Cardano (ADA), Polygon (MATIC), Filecoin (FIL), The Sandbox (SAND), Axis Infinity (AXS), Chiliz (CHZ), Flow (FLOW), Internet Computer Protocol (ICP). Are. ), Near Protocol (NEAR), Voyager (VGX), Dash (DASH) and NEXO (NEXO).

More than 40 pages of the 101-page filing aim to prove that those tokens are securities. There is little mention of Coinbase in those pages other than the fact that it lists the above tokens, implying that Coinbase’s conduct is entirely out of the question.

3. Staking services are a security offering

The SEC said that Coinbase’s staking service constitutes an unregistered securities sale and an offering in and of itself. Coinbase markets its staking service as an investment opportunity, profiting from the service, giving users expectations of profit, and otherwise meeting the conditions required for the offering as a security.

Coinbase expected the SEC to target its stake offering for early 2023 and changed its staking model in March. The SEC acknowledged the change, citing a relevant filing, but otherwise did not provide comment.

4. Coinbase’s Crypto Ratings Council Backfires

Although Coinbase has operated since 2012, the SEC’s case text considers Coinbase’s activity from 2019 to be a “relevant period” for its allegations.

This period appears to be relevant as Coinbase has greatly increased its listings starting in 2019; It nearly doubled its listings by the end of 2020.

Those listings were driven by the launch of the Coinbase-led Crypto Ratings Council (CRC) in 2019. Coinbase used the CRC framework to determine which cryptocurrencies were suitable for listing. It also used this information to take precautionary measures, even asking a potential listing to modify the language it “contains securities.”

However, the SEC said that these actions showed that Coinbase listed coins it knew had the properties of securities. Thus, his efforts to comply failed.

5. Coinbase’s stock listing doesn’t help its case

The SEC noted that it approved a public stock offering from Coinbase’s parent company, CGI. The company’s stock began trading as COIN on April 14, 2021.

Coinbase officials have repeatedly stated that this successful stock listing is a sign of SEC approval – which includes a recent tweets In which CEO Brian Armstrong says that the SEC “reviewed our business and allowed us to become a public company in 2021.”

The SEC countered this, saying that approval of the stock offering is not an “opinion or endorsement on the validity of the issuer’s underlying business”. In addition, it states that CGI has acknowledged securities related risks in its prior stock filings.

6. The charges only partially resemble the case with Binance

The SEC’s charges against Coinbase are in some ways similar to its charges against Binance. The regulator similarly accused Binance of failing to register. Its complaint also covers large sections of third-party cryptocurrency listings.

However, the SEC also alleged that Binance and its US counterpart allowed users to bypass geoblocking, engaged in fraud, allowed wash trading, and failed to separate US and global operations. The SEC did not make similar allegations against Coinbase.

The SEC also directly charged Binance CEO Changpeng Zhao and named him as a defendant. It did not charge any Coinbase executives in the related case.

7. SEC seeks injunction and penalty

The SEC said it wanted to restrain Coinbase and its members from violating the Securities Act and Exchange Act.

The regulator also said it wants Coinbase to be ordered to forfeit its illegal profits and pay a civil penalty; It also left room for requesting further relief. It did not say how much Coinbase could be made to pay in penalties and disgorgement.

It is unclear how these charges and demands will affect Coinbase’s day-to-day business. Coinbase has repeatedly stated that it intends to fight the SEC in court.

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