Headline: The SEC goes after Coinbase
Body: In the 1980s, there was the War on Drugs, where punishments for holding small amounts of drugs and paraphernalia were sanctioned with significant prison terms. Well, some might argue that there is now a “War on Cryptocurrency” being waged by the federal government. ( In point of fact, an official in the counsel function for Coinbase said, “The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” Whether or not this is true is, of course, rather dependent upon the viewer’s identity. We just had an entry on Binance, now we present the attack (?) of the SEC upon Coinbase.
Who is Coinbase and what were they charged with?
OK, just a quick review. Coinbase is a publicly owned entity (in full disclosure, I own a few shares. It is in no way material with respect to my net worth.) The point is that BinanceUS and most of those related entities were setup as LLCs and functioned somewhat like partnerships. So, even if Coinbase did something criminal, it could be very difficult indeed to pierce the corporate veil. That said, the federal government is quite good at putting these cases together.
They have been charged with many of the same abuses that Binance is accused of. Among the charges are acting as an unregistered broker and clearing agency, which is quite serious as the registration orders them to disclose significant information to the public and undergo periodic audits by the SEC. They were also accused of doing something wrong with their staking-as-a-service enterprise.(This one is a new one on me too. Coinbase was acting as an intermediary and putting together groups to fund the validation of certain transactions.) Said Mr. Gurbir S. Grewal, director of SEC division of Enforcement:
You simply can’t ignore the rules because you don’t like them or because you’d prefer different ones: the consequences for the investing public are far too great, As alleged in our complaint, Coinbase was fully aware of the applicability of the federal securities laws to its business activities, but deliberately refused to follow them. While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices.”
The SEC’s complaint alleges breakage of several registration provisions of both the 1933 and 1934 Securities Acts. Like Binance, they are also in trouble for their staking-as-a-service program, linking various individuals to fully stake a validator. (So many interesting wonky things have been omitted here because, sigh, normal people probably won’t be interested in the intricacies of definitions of securities and the like.) In an interesting twist, Coinbase started the Crypto Rating Council which ruled on how “security-like” each asset was. Per the SEC, even by their own definition, Coinbase went on to offer dozens of assets that were at very high risk of being “security-like.” In an ironic twist, the staking activity was started to allow small investors to profit from the entrepreneurial efforts of others, and thereby democratize finance. Now, the SEC is pressing for this to be a trial by jury, ostensibly made of those same citizens.
Kraken faced a $30 Million fine and a demand from the SEC to stop its staking-as-a-service function.
Does all of this really matter to Coinbase?
Well, maybe. It is true that only 3% of their revenues come from staking activities. But, it is also true that staking activities have been increasing a lot and will likely become more substantial in the future.
The Verdict
Well, Coinbase certainly has its work cut out for it. But, there seems to be a conservative bent to most of the judiciary right now, and they usually sway towards less regulation. Further, I have great faith in Coinbase’s ability to come up with a different description of their service that will render the service suddenly legal.
REFERENCES
SEC charges Coinbase for illegally operating an unregistered securities exchange – MarketWatch
Coinbase’s Staking Service Faces Questions After Kraken’s SEC Settlement (coindesk.com)
Crypto exchange Coinbase is reportedly facing an SEC investigation over securities – The Verge
REFERENCES
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.