SEC sues Coinbase over alleged securities violations, fraud

Crypto platform Coinbase is being sued by the Securities and Exchange Commission, which alleges the company is operating as an unregistered securities exchange. Yahoo Finance's Jennifer Schonberger breaks down the SEC's allegations.

Video transcript

- We do have to pivot though and talk about Coinbase. Coinbase is the latest crypto exchange in the SEC's crosshairs. The regulator is suing the crypto exchange alleging that Coinbase was acting as an unregistered broker and exchange. And joining us now is Yahoo Finance's Jennifer Schonberger with more on this. Jennifer?

- Good morning, Brad. That's right, the SEC suing Coinbase this morning in the Southern District of New York for failing to register its trading platform with the agency, alleging that it was an unregistered National Securities Exchange broker and clearing agency. The SEC also bringing charges against the largest US crypto trading platform for failing to register its crypto assets staking as a service program.

According to the SEC's complaint, since 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities. SEC Chair, Gary Gensler, saying in a statement this morning, quote, "We allege that Coinbase, despite being subject to securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions. In other parts of our securities markets, these functions are separate."

The SEC alleges that since 2019, Coinbase has been engaging in an unregistered securities offering through its staking as a service program, which essentially allows customers to earn profits from the proof of stake mechanisms of blockchains as well as through Coinbase's efforts.

Through this staking program, Coinbase allegedly pools each type of customer's stakeable crypto assets, stakes the pool to perform blockchain transaction validation services, and provides a portion of the rewards generated from this work to its customers whose assets were part of the pool. Now, the SEC says Coinbase failed to register its offer and sales of this staking program, which would be required by law.

I have reached out to Coinbase for comment. A comment was not immediately available. However, I did speak with Coinbase's chief public policy officer, Faryar Shirzad, earlier this spring about whether Coinbase has tried to register with the SEC. He told me that they have filed questions to the SEC going back a year ago to last June.

Take a listen to what he told me.

- There's no path to registering. We've tried, and there's just no way to do it. And in fact, we've submitted a petition with the SEC back in June where we enumerated the specific issues that the agency would have to resolve for crypto platforms to be able to come in and register.

We think the opportunity to build a crypto securities market in the United States is enormously exciting, but we've stayed away from it because there's no path to registration, and there's just no way to do it.

- These charges coming just a day after the SEC leveled charges against Binance, Coinbase's rival, as well as Binance's founder, CZ, for operating an illegal trading platform and misuse of customer funds. Guys.

- Jennifer Schonberger, thank you so much for covering this for us. And this is so interesting, Brad, because it has set up the crypto industry, which has portrayed itself as victimized by regulators who have not offered it clear guidance. You heard that also in the comments that Jen cited there. Versus a regulatory regime that's saying, you're not supposed to be doing this. It's quite an interesting tension.

- Right. And it seems that each of the people that were at the top of some of the offerings or the decisions to bring these offerings to market, they knew that they were offering this to customers in the US, where it was unregulated, and they were not registering the exact type of service they were bringing to the table.

And for those who don't know, staking is essentially where people can purchase a cryptocurrency, store those coins from utilization for a period of time, and store them with Coinbase in that capacity and then use those as part of transaction validations, which typically help for blockchain viability there.

However, if those coins are being put to use elsewhere, then it raises a larger question of, all right, similar to what we have seen in other crypto practices where there is a misuse or mishandling of coins that were supposed to be meant for storage. And instead of just for-- and instead, being put to use elsewhere as well.

- I mean, if I understand it correctly, it's kind of like what banks do in their business. You put your deposits at the bank, and the bank can effectively--

- Use that to lend.

- Correct. But you're not supposed to be doing that with cryptocurrencies. I mean, I should mention we're showing Bitcoin up on the screen here because there is this broader now sentiment hit to cryptocurrencies more broadly as a result of these regulatory actions because there are a lot of questions about what it now means to hold crypto, particularly in the US, where you can hold it, what you can do with it.

And so we've been seeing Bitcoin move down. Binance's coin is actually not moving much today, but it has been moving down. It's more meant-- isn't Binance more of a stable? I don't know that much about Binance.

- Binance USD was more of the stable coin.

- So it's not been moving much.

- But they had offered for Binance for Coinbase. Coinbase, they had just started their staking practice, or at least the service, within recent years and since going public. And they had two drivers from that. There was a price from impact but also the staking rewards rates as well that they had to communicate continuously.

And so even within the end users looking at it as a reward type of process, that's how they were leveraging it within their marketing to get more staking to take place. And it was a small portion of the revenue they were bringing in.

- Well, coming up later, we're going to talk to Mark Palmer of Berenberg. He says that this kind of action could affect 37% of Coinbase's revenue. So we're going to get more details from him.