SEC sues Coinbase for violating securities laws, key points from the complaint.

23-06-06 22:04

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Original title: "SEC sues Coinbase for violating securities laws, key points from the complaint (continuously updated)"

Source: ODAILY Star Daily

SEC 起诉 Coinbase 违反证券法，速读起诉书重点（持续补充）

After suing Binance and its CEO Changpeng Zhao yesterday, the U.S. Securities and Exchange Commission (SEC) has once again taken action by filing a lawsuit against the U.S. compliant cryptocurrency exchange platform Coinbase, Inc. and its parent company in the New York Federal Court.

Coinbase Global, Inc. ("CGI"). Upon the news, Coinbase's stock price (COIN.O) fell more than 12% in pre-market trading, with Bitcoin dropping to $25,350 and ETH dropping to $1,797. The indictment is 101 pages long, and Odaily Star Daily has summarized the key points as follows:

1. Coinbase is the largest cryptocurrency asset trading platform in the United States, serving over 108 million customers. American users can purchase, sell, and trade cryptocurrency assets through the platform. Coinbase offers assets including cryptocurrency securities and has earned billions of dollars in revenue. However, they have not provided disclosure and protection for investors, putting them at significant risk.

2. According to the Securities Exchange Act of 1934, the functions of brokers, trading platforms, and clearinghouses in traditional securities markets are separate. However, Coinbase platform combines these three functions to provide trading, brokerage, and clearing agency services to US customers, and it has not registered with the SEC or obtained any applicable exemptions. For years, Coinbase has disregarded regulatory structures and evaded disclosure requirements from Congress and the SEC.

3. During the same period, Coinbase also provided unregistered broker services through two other businesses: Coinbase Prime, which sends orders to the Coinbase platform or third-party platforms to help customers "access a wider range of cryptocurrency markets, not just rely on Coinbase's trading platform prices"; Coinbase Wallet, which passes customer orders through third-party so-called "decentralized" trading platforms to obtain liquidity outside of the Coinbase platform. 3. During the same period, Coinbase also provided unregistered broker services through two other businesses.

4. In addition to promoting secondary market transactions through the above methods, Coinbase also allows issuers to sell cryptocurrencies for the first time through "Asset Hub", which is described as "a platform for asset issuers to list, issue, and grow assets through Coinbase products". Coinbase boasts that "Asset Hub" allows issuers to list assets on the trading platform, custody them, and have them appear on all of their trading interfaces using a single application.

5. Coinbase has always generated trading revenue by offering cryptocurrency assets, while ignoring the fact that these assets have securities attributes. Since 2016, Coinbase has understood that cryptocurrency assets should be regulated by securities laws and has positioned itself as a "compliant" platform in its marketing. Although it verbally expresses its willingness to comply with applicable laws, it has continued to allow cryptocurrency assets that meet the Howey Test standard to be traded. (Note: The SEC determines the securities attributes of cryptocurrency assets through the Howey Test.)

6. Since 2019, Coinbase has provided Staking services, allowing investors to earn rewards through staking. Coinbase receives a commission of 25-35%. The five cryptocurrencies involved in Staking services are both investment contracts and securities, but Coinbase has never registered with the SEC for the issuance and sale of Staking projects, depriving investors of important information about the plan, harming their interests, and violating the registration requirements of the Securities Act of 1933.

Therefore, CGI also violates relevant regulations of the Securities Exchange Act. 7. Most of Coinbase's revenue comes from fees for cryptocurrency transactions through the Coinbase platform, Prime, and Wallet. In 2021, Coinbase's trading revenue was $6.8 billion, with a total net revenue of $7.4 billion; in 2022, the total net revenue was $3.1 billion, with trading revenue of $2.2 billion. It should be noted that the revenue and expenses generated by Coinbase flow to its parent company, CGI, which is actually the ultimate controlling entity of Coinbase. The two companies have the same board of directors, and most of CGI's executives also hold the same administrative positions at Coinbase, including Brian Armstrong, who is also the CEO of Coinbase. In fact, the two entities do not distinguish themselves from each other and, like Coinbase, also violate relevant regulations of the Securities Exchange Act.

8. SEC seeks final judgment: (a) permanently enjoin Defendant from violating securities laws; (b) order Defendant to disgorge ill-gotten gains and pay prejudgment interest; (c) impose civil penalties against Coinbase and require it to provide appropriate or necessary equitable relief for the benefit of investors. (Note: In SEC's ruling against Binance, it also permanently enjoined Binance from engaging in any financial industry-related business.)

9. According to Article 22(a) of the Securities Law, the Southern District of New York is the most appropriate venue for trial. Coinbase operates in this district, providing brokerage, trading, and other services to investors located in this district, and holds licenses for conducting cryptocurrency and currency transfer business activities in this district.

10. Coinbase claims to serve over 108 million customers, including US customers, with daily trading volumes in the billions of dollars. In recent years, the Coinbase platform has experienced exponential growth: in April 2021, Coinbase offered trading for approximately 55 tokens; by March 2023, this had increased to 254. As of December 2022, Coinbase allows users to trade over 16,000 different cryptocurrency assets through their wallet.

11. Coinbase spends hundreds of millions of dollars each year on marketing and sales to maintain and recruit new investors. According to the 2022 10-K form submitted by CGI, Coinbase's "success depends on our ability to retain existing customers and attract new customers (including developers) to increase engagement with our products, services, and platform." The Coinbase website is filled with links to register for a Coinbase account and advertisements for various marketing activities aimed at attracting more investors to the Coinbase platform. (Note: Almost all cryptocurrency platforms have adopted similar marketing strategies.)