Ten states take legal against Coinbase for 'violating securities law'

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Ten states have taken legal action against Coinbase over violating trading laws just hours after the SEC sued the crypto platform. 

A task force of regulators from the states initiated legal proceedings against Coinbase on Tuesday, accusing the company of violating securities regulations in connection with its staking offerings.

Coinbase is accused of failing to register its staking offerings with the Securities Departments of the 10 states - Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin. 

The states' regulators sent a show cause notice to regulators, meaning the company now has 28 days to justify why it should not be given an order to stop selling unregistered securities in each state.

'This action will protect consumers and investors to ensure they can make informed and safe decisions in Illinois and across the nation,' said Illinois' Secretary of State Alexi Giannoulias.

'Illinoisans who invest their money in Coinbase or any other digital asset trading business deserve both security and transparency and my office intends to hold crypto companies to the highest standards.'

Illinois' complaint accuses Coinbase of violating 'the securities law by offering its staking rewards program accounts to Alabama residents without a registration to offer or sell these securities.'

Staking is the strategic pledging of digital assets to confirm transactions in exchange for potential payment. 

It also states that registration would have given the state's residents the opportunity to evaluate the risks involved and compare Coinbase's staking offerings with other investments.

Moreover, the complaint notes that Coinbase is not a member of the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, which means investors are not protected from the company's losses. 

The 10 states' legal action against Coinbase comes on the same day the Securities and Exchange Commission charged the company with violating securities laws.

In a civil complaint on Tuesday, the SEC accused Coinbase of operating its crypto trading platform as an unregistered national securities exchange, broker, and clearing agency.

The suit alleges that since 2019, Coinbase has made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities, and exposing investors to 'significant risk.'

Coinbase shares plunged by more than 20 percent in pre-market action after the news broke, before paring losses by midday, when they were down 11 percent.

In a statement on Twitter, Coinbase CEO Brian Armstrong said the SEC complaint 'is exclusively focused on what is or is not a security' adding that the company is 'confident in our facts and the law.'

Gurbir S. Grewal, Director of the SEC's Division of Enforcement, said: '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.' 

The SEC also charged Coinbase for failing to register the offer and sale of its crypto asset staking-as-a-service program, in which the company pays customers to use their crypto tokens to facilitate blockchain transactions.

Users of trading platforms can stake their cryptocurrency, essentially locking up some of their assets, in exchange for payment later, much like earning interest rates in a savings account.

Those assets are used by platforms like Coinbase Global to guarantee other transactions taking place on the blockchain. Coinbase has been critical of regulations related to staking, calling them vague.

The SEC claims Coinbase intertwines the traditional services of an exchange, broker, and clearing agency without having registered any of those functions with the commission, as required by law.

In a statement, Coinbase Paul Grewal told DailyMail.com: '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.'

'The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we'll continue to operate our business as usual,' he added.

On Monday, the SEC charged Binance, its CEO Changpeng Zhaoand the operator of Binance US over what it called a 'web of deception' to evade US laws.

Binance saw net outflows of $778.6 million of crypto tokens on the ethereum blockchain, with its U.S. affiliate, Binance.US, registering net outflows of $13 million, according to data firm Nansen.

The SEC alleged in 13 charges that Binance artificially inflated its trading volumes, diverted customer funds, failed to restrict U.S. customers from its platform and misled investors about its market surveillance controls.

In statements on Monday, Binance said it had been cooperating with the SEC's probes and had 'worked hard to answer their questions and address their concerns', including by trying to reach a negotiated settlement.

'We intend to defend our platform vigorously,' Binance said in a blog.