US States Are Going After Coinbase Following SEC Lawsuit — Here’s How

A collection of states are going after Coinbase for alleged securities violations, yet another blow to the American crypto exchange after the Tuesday SEC lawsuit. 

Securities regulators from Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin are part of a task force aimed at Coinbase’s trading and staking services. 

A number of the states noted in news releases that Coinbase’s staking program is not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC).

Various “show cause” orders — such as the one issued by the Alabama Securities Commission (ASC) — served to amplify the impact of the SEC’s lawsuit against Coinbase, according to Mark Palmer, a research analyst at Berenberg Capital Markets. 

“The orders mean that Coinbase will have to offer a defense of its staking operations within the next 28 days, with the knowledge that its ability to operate in those states is likely to be curtailed,” Palmer said. “Coinbase is also likely to be asked about the size of the commissions that the company charges on staking, which are much larger than average, and the associated disclosures.”

The ASC’s order does not prohibit Coinbase from offering staking, as long as it complies with Alabama’s laws, the agency said in a statement. 

Though there is no fee to stake or unstake, Coinbase takes a commission based on the rewards users receive from the network. Standard commission ranged from 25% to 35%, as of March 2.

Richard Mico, the US CEO and chief legal officer at crypto infrastructure provider Banxa, said Tuesday’s actions display the “concerted effort” at both the state and federal levels against crypto, and staking services in particular. 

“I suspect we’ll have a better understanding of these actions in the coming weeks, but, again, these measures most certainly appear to have been coordinated well in advance and in turn are targeting critical aspects of the crypto industry in the United States,” he told Blockworks. 

Adam Cochran, a partner at venture capital firm Cinneamhain Ventures, said in a tweet the claims that Coinbase’s staking service was an unregistered securities offering was “a small issue comparatively” to the rest of the SEC’s lawsuit.

Coinbase Chief Legal Officer Paul Grewal said Tuesday that the SEC’s enforcement-only approach in the absence of clear crypto guidelines hurts companies like Coinbase “that have a demonstrated commitment to compliance.”

A company spokesperson told Blockworks Coinbase is reviewing the actions by various state securities regulators and intends to have “productive conversations” with them. 

“We are confident that our staking services are not securities under federal or state law,” the Coinbase representative added.

New Jersey
The New Jersey Bureau of Securities issued a summary cease and desist order to Coinbase. As part of the order, the state seeks to levy a $5 million fine against Coinbase for selling “unregistered securities.”

New Jersey is also taking issue with Coinbase’s staking program, which offers five crypto assets including XTZ, ATOM, ETH, ADA and SOL. 

New Jersey authorities claim Coinbase was advertising returns of up to 10% on investments.

“The cryptocurrency securities market is not a free-for-all where companies can make up their own rules,” Executive Assistant Attorney General Shirley Emehelu said in a statement. “These companies play up the rewards but are less likely to address the risks of investing in crypto and through this action we are making sure they comply with our rules.”

Over 145,000 New Jersey residents have invested in staking securities on Coinbase as of March 29, according to the statement.

The New Jersey Bureau of Securities is not new to issuing crypto-related cease and desist orders — putting forth its first one in 2018 against Steven Seagal-endorsed initial coin offering (ICO) Bitcoiin. The state agency later ordered New Jersey-based BlockFi and Celsius to stop offering interest-earning crypto accounts in July and September of 2021, respectively. 

Illinois 
The Illinois Secretary of State’s Securities Department mailed a notice of an Aug. 8 hearing to Coinbase and Coinbase Global on Tuesday. 

Illinois — like the SEC and other states — claims that Coinbase’s staking products are unregistered securities. If found guilty of breaking Illinois securities laws, Coinbase would have to pay a $10,000 fine per violation.

There are a similar number of staking accounts in Illinois and New Jersey, with Illinois residents having about 140,000 of them — collectively worth $228 million. 

If the respondents fail to respond to the Illinois notice within 30 days, they forfeit their right to a hearing. 

Maryland
Maryland issued a summary cease and desist order to Coinbase, as well as orders for the exchange to show cause why they shouldn’t be barred from securities and investment advisory business activities in the state.

If Coinbase is found guilty, it would be penalized $5,000 for each violation of Maryland’s securities registration requirements. Additionally, Coinbase will be permanently barred from operating in the state. 

Coupled with the order is an opportunity for a hearing, to which Coinbase must respond within 15 days. Failure to respond means all the penalties described in the order will be applied with no further recourse. 

As of March 29, over 75,000 Marylanders were “active investors” in Coinbase Earn, whose accounts totaled more than $84 million. 

Kentucky
Kentucky’s Department of Financial Institutions filed an administrative complaint Tuesday and sent it to Coinbase, containing similar allegations and rule violations as the other states’ complaints. 

The state is ordering Coinbase to stop accepting new deposits and is levying a steeper $20,000 fine per violation on behalf of the roughly 28,000 Kentucky residents with over $24 million invested in Coinbase’s staking program. 

Coinbase has 20 days to respond to Kentucky’s complaint and request a hearing on the matter.

South Carolina
South Carolina ordered Coinbase to cease and desist from doing business in the state based on its investigation that found the crypto exchange was selling unregistered securities.

Should there be no hearing and the order goes into effect, Coinbase will be forced to pay a civil penalty of $4.37 million to the state. If there is a hearing, which Coinbase must request within 30 days from now, a $10,000 fine will be imposed per transgression.

Nearly 44,000 South Carolina citizens were staked through Coinbase, their investments worth over $37 million.

California
California submitted an order telling Coinbase to stop “the further offer and sale of securities” including but not limited to its staking offerings.

The state has roughly 644,000 investors who have staked $1.2 billion worth of crypto with Coinbase. 

California investigators allege that Coinbase “willfully violated” state laws and intends to issue a fine of $1,000 for the first offense and $2,500 for subsequent offenses.

Additionally, Coinbase has 30 days to request a hearing, a California government spokesperson told Blockworks.

 

Source: blockworks.co