After indicting Binance and its CEO Changpeng Zhao yesterday, the U.S. Securities and Exchange Commission (SEC) fired again, suing the U.S. compliant encryption trading platform Coinbase, Inc. (Coinbase) and its parent company Coinbase Global, Inc. ("CGI"). As soon as the news came out, the stock price of Coinbase (COIN.O) fell more than 12% before the market, Bitcoin fell to $25,350 at one point, and ETH fell to $1,797. total indictment101 pages, Odaily summarized the key points as follows:
1. Coinbase is the largest encrypted asset trading platform in the United States, through which American users can provide encrypted asset purchases, sales and transactions; Coinbase provides assets including encrypted asset securities, earning billions of dollars in income, but has no interest in investors Information disclosure and protection exposes it to enormous risks.
2. According to the Securities Exchange Act of 1934, the functions of brokers, exchanges and clearing agencies in the traditional securities market are separated, but the Coinbase platform combines three functions to provide trading, brokerage and clearing agencies for US customers services and is not registered with the SEC nor has any applicable exemption. For years, Coinbase has flouted regulatory structures and evaded disclosure requirements from Congress and the SEC.
3. During the same period, Coinbase also provided unregistered brokerage services through two other businesses: Coinbase Prime, which sends orders to the Coinbase platform or third-party platforms, thereby helping customers access a wider range of encrypted markets, rather than relying solely on Prices on the Coinbase exchange; Coinbase Wallet, which routes customer orders through third-party so-called decentralized exchanges to obtain liquidity outside of the Coinbase platform.
4. In addition to promoting secondary market transactions through the above methods, Coinbase also allows issuers to sell encrypted assets through Asset Hub for the first time, and describes Asset Hub as asset issuers can use Coinbase products to achieve asset listing, issuance and increase. Coinbase boasted that “Asset Hub” lets issuers use a single app to list assets across exchanges, custody, and all of its trading interfaces.
5. Coinbase has always obtained trading income by providing encrypted assets, while ignoring that these assets have securities attributes. Moreover, since 2016, Coinbase has understood that encrypted assets should be regulated by securities laws, and has always positioned itself as a compliance platform in its marketing; although it verbally expressed its willingness to abide by applicable laws, it has always made it comply with Howey Test Standard encrypted assets are used for transactions.(Odaily Note: Howey Test is mainly used to determine the security attributes of encrypted assets.)
6. Since 2019, Coinbase has provided Staking services, allowing investors to earn returns through staking, and Coinbase gets a 25-35% commission. By the end of 2021, 1.725 million US investors participated in Coinbases Staking service, with a total value of approximately US$28.7 billion; as of July 2022, more than 4 million US customers have participated. The five cryptocurrencies involved in Staking services (XTZ, ATOM, ETH, ADA, and SOL) are both investment contracts and securities, but Coinbase has never registered with the SEC for the issuance and sale of Staking projects, and lacks complete and detailed information disclosure, to the detriment of investors and a violation of the registration provisions of the Securities Act of 1933.
7. Most of Coinbases revenue comes from fees for crypto transactions through the Coinbase platform, Prime, and Wallet. In 2021, Coinbases transaction revenue will be $6.8 billion, with a total net income of $7.4 billion; in 2022, the total net income will be $3.1 billion, with a transaction revenue of $2.2 billion. It should be noted that the income and expenses generated by Coinbase flow to its parent company CGI, which is actually the actual controller of Coinbase. The two companies have the same board of directors, and most of CGIs executives also hold the same executive positions at Coinbase. , including Brian Armstrong, who also serves as CEO of Coinbase. In fact, the two entities did not distinguish themselves, so CGI, like Coinbase, violated the relevant provisions of the Securities Exchange Act.
8. The SEC seeks a final judgment: (a) permanently prohibit the defendant from violating the relevant provisions of the securities law; (b) order the defendant to hand over the illegal gains and pay interest in advance; (c) impose a civil fine on Coinbase and require it to appropriate or necessary equitable relief in the interests of investors.(Odaily Note: In the SECs ruling against Binance, it is also prohibited from permanently engaging in financial industry-related businesses.)
9. The Southern District of New York is the most appropriate venue under Section 22(a) of the Securities Act. Coinbase conducts business in the zone, including providing brokerage, trading and other services to investors located in the zone, and holds a license to carry out encrypted assets and currency transmission business activities in the zone.
10. Coinbase claims to serve more than 108 million customers, including US customers, with daily trading volume in the billions of dollars. Over the past few years, the Coinbase platform has grown exponentially: in April 2021, Coinbase offered about 55 tokens for trading; in March 2023, it increased to 254; Trade over 16,000+ crypto assets.
11. Coinbase spends hundreds of millions of dollars each year on marketing and sales to maintain and recruit new investors. According to the 2022 Form 10-K filed by CGI, Coinbases success depends on our ability to retain existing customers and attract new customers, including developers, to increase engagement with our products, services and platforms. Coinbase website The website is filled with links to sign up for a Coinbase account and advertisements for various marketing campaigns aimed at attracting more investors to the Coinbase platform. (Odaily Note: Almost all encryption platforms have adopted a similar marketing model, and may become a crime listed by the SEC in the future.)
12. In September 2019, Coinbase established the Encryption Rating Committee (CRC) to score the Howey Test of encrypted projects and then determine whether to list them. However, in order to achieve the exponential growth of the platform and increase its own trading profits, even though some projects have high risk scores and meet securities standards, Coinbase still insists on going online. A year after the CRC was established, the number of crypto assets on the Coinbase platform has doubled, and the same will be true in 2021. Even the Coinbase listing team will directly talk to the asset issuer, asking them to delete some words (speech) and statements that are contrary to the Howey Test, so as to avoid regulatory review.
13. There are a total of 13 types of security tokens in the Coinbase indictment, including:SOL, ADA, MATIC, FIL, SAND, AXS, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO——The first 12 Coinbase platforms support transactions, and the last one can only be traded through wallets(Odaily Note: The tokens involved in the Binance lawsuit include SOL, ADA, MATIC, FIL, ATOM, SAND, MANA, ALGO, AXS, and COTI).In July last year, the SEC listed nine cryptocurrencies on Coinbase as securities, namely AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM. secret deal.
14. Coinbase requires customers seeking to buy, sell or transact through the Coinbase platform and Prime to create an account on coinbase.com and transfer their crypto assets or fiat currency to Coinbase. Once the assets are transferred, Coinbase will post the corresponding amount in the internal ledger of the customers account; Coinbases internal ledger tracks each deposit and withdrawal of crypto assets and fiat currency individually for each customer, and also transfers the deposit and withdrawal of similar in nature. Client funds and crypto assets are mixed together.
After the SEC sued,New Jersey Regulatory DepartmentJoined the fray, announcing an investigation into Coinbase’s staking business sales violations and issuing a brief cease and desist order. The New Jersey Department of Securities has decided to fine Coinbase $5 million for selling unregistered securities to residents of the state while it was not registered in the state.
