Coinbase vs. SEC: Everything You NEED To Know!

Coinbase vs. SEC Lawsuit Summary

• The SEC sued Coinbase, the largest crypto exchange in the United States, for allegedly violating Securities laws, a surprising move considering the SEC approved Coinbase's stock for trading.

• Coinbase received a Wells notice from the SEC in March, and the lawsuit focuses on alleged violations of Securities laws.

• Unlike the lawsuit against Binance, the SEC's suit against Coinbase centers on how Coinbase combines exchange functions, which are traditionally segregated, and has failed to register as either a broker exchange or Clearinghouse.

"The Exchange had received a Wells notice from the SEC back in March."

CoinBase's Alleged Violations

• The SEC alleges that Coinbase is an unregistered broker, an unregistered exchange and an unregistered Clearinghouse for failing to register with the regulator.

• The combination of these functions allegedly allowed Coinbase to avoid regulatory disclosures that come with registering as a regular broker exchange or Clearinghouse.

• Coinbase's staking program constitutes a Securities offering because it provided an expectation of profit when its users gave it coins and tokens to stake on their behalf, even though this expectation exists independent of Coinbase.

• Securities available to retail investors on Coinbase's exchange, Coinbase Prime platform, and Coinbase wallet, include Securities offered by Coinbase's staking program.

• The SEC alleges that Coinbase made Securities available to retail investors on its platforms that have not gone through proper regulatory channels, potentially putting retail investors at risk.

"The authors then allege that Coinbase did this to evade regulatory scrutiny, because it means that they didn't have to provide the disclosures that come with registering as a regular broker, exchange, or Clearinghouse."

SEC's Relief Sought

• The SEC wants Coinbase to cease operations until it registers with the regulator and to quote "discourage its ill-gotten gains".

• The SEC could fine the company billions if it wins.

"Regarding the relief sword, the SEC basically wants Coinbase to cease further operations until it registers with the regulator and to quote discourage its ill-gotten gains. This is code for paying a very large fine which could easily run into the billions if the SEC wins."

Coin vs. SEC Lawsuit - Background and Context

• The crypto industry has been calling for crypto-specific regulations, but they may not come anytime soon in the US.

• The authors of the lawsuit discuss the registration processes required for brokers, exchanges, and clearinghouses, arguing that these processes are primarily designed to protect existing financial institutions from competition from cryptocurrency exchanges.

"They explain that these registration processes are required for investor protection but, in reality, they're mostly designed to protect existing financial institutions from competition from say cryptocurrency exchanges"

Cryptocurrency Basics

• The authors provide background about the crypto industry, explaining what cryptocurrencies are, how they work, and including cryptocurrency wallets.

• The author suggests getting a hardware wallet for secure crypto storage and a discount on the best hardware wallets on the Coin Bureau deals page.

"Now is a good time to get your hands on a hardware wallet if you don't have one already, and you can get discounts on the best hardware wallets on the Coin Bureau deals page"

ICOs and Cryptocurrency Securities

• The authors explain that some cryptocurrencies have been distributed via initial coin offerings (ICOs), and some issuers continue to sell the crypto assets after the initial offer and sale, including directly or indirectly by selling them on crypto asset trading platforms.

• Any selling of coins or tokens by entities affiliated with the creation of a crypto project makes those coins and tokens securities.

• The authors note that if this is the case, then every single cryptocurrency aside from Bitcoin is a potential target.

"If this is the case, then literally every single cryptocurrency besides BTC is a potential target, something that SEC Chairman Gary Gensler has said"

Coinbase Exchange Registrations and Registrations in General

• The SEC asked crypto exchanges to register with the regulator in 2017 when it published the Dow Report.

• This is peculiar when you consider that the SEC alleges Coinbase only started violating securities laws with its products and services in 2019.

• The authors note that registration processes for brokers, exchanges, and clearinghouses are required for investor protection but are mostly designed to protect existing financial institutions from competition from cryptocurrency exchanges.

"Registration processes are required for investor protection but, in reality, they're mostly designed to protect existing financial institutions from competition from say cryptocurrency exchanges"

Coinbase's Product and Service Offerings

• Coinbase has been around since 2012, and its Coinbase Prime service was released for institutional investors in 2021, while its Coinbase Wallet was released to both retail and institutional investors in 2017.

• The authors argue that Coinbase is acting as a broker via the Coinbase Wallet.

• The SEC has a problem with the wording in one of Coinbase's SEC disclosures.

"The authors note that Coinbase has been around since 2012, that its Coinbase Prime service was released for institutional investors in 2021, and that its Coinbase Wallet was released to both retail and institutional investors in 2017" (536)

"The authors again argue that Coinbase is acting as a broker via the Coinbase Wallet"

Coinbase and the Crypto Ratings Council

• Coinbase co-founded the Crypto Ratings Council, which rates how security-like cryptos are on a five-point scale.

• The Crypto Ratings Council references a public document by the SEC, which provides regulatory clarity about which cryptos count as securities.

• Coinbase actively tries to comply with Securities regulations.

"This seems to be because the Crypto Ratings Council references a public document by the SEC, which effectively provides regulatory clarity about which cryptos count as securities. This is ironic considering its irrefutable evidence of Coinbase actively trying to be compliant with Securities regulations."

Cryptos Listed on Coinbase

• The number of cryptos offered by Coinbase began to grow quickly after the Crypto Ratings Council was established in 2019.

• Some cryptos listed by Coinbase had characteristics of a security as per the Crypto Ratings Council's securities criteria.

• Coinbase coached crypto projects on how they should change so that they don't meet the four criteria of the Howie test.

• The SEC made similar accusations in its lawsuit against Bittrex.

"The suits authors then point out that the number of cryptos offered by Coinbase began to grow quickly after the Crypto Ratings Council was established in 2019. They allege that some of the cryptos Coinbase listed had characteristics of a security as per the Crypto Ratings Council's own securities criteria. They also allege that Coinbase coached crypto projects on how they should change so that they don't meet the four criteria of the Howie test."

Acknowledgment by Coinbase

• Coinbase acknowledged in its disclosures that some of the assets, products, and services it offers could be classified as securities or securities offerings by the SEC.

• The excerpt of this acknowledgment suggests Coinbase's defense will be the SEC's definition of what a security is still isn't clear when it comes to crypto.

"Coinbase acknowledged in its disclosures that some of the assets, products, and services it offers could be classified as Securities or Securities offerings by the SEC. The biggest takeaway is that the SEC's definition of what a security is still isn't clear when it comes to crypto."

Coinbase and SEC Registration

• Coinbase claims that it doesn't need to register with the SEC because it doesn't list Securities.

• The SEC is arguing that Coinbase is listing cryptos that are classified as securities and it must, therefore, register as a broker, exchange, or clearinghouse.

• The SEC considers Sol, Ada, Matic, FIL, Sand, AXS, CHZ, Flow, ICP, Near, VGX, Dash, and Nexo to be Securities.

• Coinbase listed these securities on its range Coinbase Prime or the Coinbase Wallet.

"Coinbase claims that it doesn't need to register with the SEC because it doesn't list Securities. In other words, the only reason why brokers, exchanges, and clearinghouses have to register with the SEC is that they're handling Securities. Notably, the authors point out that Coinbase listed these securities on its range Coinbase Prime or the Coinbase Wallet."

Proof of Stake

• The lawsuit's authors take issue with the fact that Coinbase "performs all of the efforts necessary and expected by investors to obtain investment returns, including staking those assets in order to obtain Rewards."

• The authors clarify what proof of stake is and how staking works.

• The authors don't state that proof-of-stake cryptos themselves are securities, which is something that Gary has implied.

"The lawsuit's authors take issue with the fact that Coinbase "performs all of the efforts necessary and expected by investors to obtain investment returns, including staking those assets in order to obtain Rewards." Notably, they don't say anything that implies that proof-of-stake cryptos themselves are securities. This is something that Gary has implied on multiple occasions, namely around the times that Ethereum was in news."

Coinbase's staking service

• Coinbase's staking service contained features that users would not have had if they staked on their own. These include low or no staking minimums, no hardware requirements, low or no lock-ups for staked crypto, and faster payout of staking rewards.

• For what it's worth, the SEC doesn't say that staking itself is a violation of securities laws, so investors can still do it without fear in the US if they plan on staking using a third-party.

• However, there could be problems, and it's possible that liquid staking D5 protocols will soon face the same SEC scrutiny. Note that there were rumors floating around that Lido Finance had been handed a Wells notice by the SEC.

• Next, the authors go on to detail exactly why Coinbase's staking service constitutes an investment of money in a common enterprise with an expectation of profits coming from a third party. They then conclude by saying that Coinbase has failed to register this securities offering with the SEC.

Crypto Legislation in the US

• Coinbase needs crypto legislation to operate in the US

• Congress needs to pass new crypto legislation for Coinbase to operate legally

Presidential Candidate Views on Cryptocurrency

• It's important to know which presidential candidates are pro-crypto

• Coin Bureau has analyzed the front runners' views on crypto

• Check out the analysis in the video description using the provided link

"Speaking of which it's important that you know which presidential candidates are pro-crypton"

Conclusion of the Video

• The video ends by thanking viewers for watching

• To support the channel, viewers can like the video, subscribe, and click the notification bell

• Massive fee discounts and bonuses can be found on the Coin Bureau deals page, linked in the video description.

"that's all for today's video folks. If you found it helpful, help me out by smashing that like button"

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