SEC Issues Legal Threats To Coinbase Over Staking Services

Key Points:

• Coinbase received a “Wells notice” from SEC regarding an unspecified portion of its listed digital assets, staking service.
• The firm states it does not list securities or offer products to its customers that are securities.

Coinbase has recently received a “Wells notice” from the U.S. Securities and Exchange Commission (SEC) regarding an unspecified portion of its listed digital assets, staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet.

The firm has expressed disappointment over the notice, stating that it does not provide much information for the company to respond to. However, it has assured its customers that its products and services will continue operating as usual.

The SEC staff has identified potential violations of securities law, but declined to specify which assets on Coinbase’s platforms they believe may be securities. The firm has provided multiple proposals to the SEC about registration, none of which has been responded to.

Coinbase has a rigorous process to analyze and review each digital asset before making it available on its exchange. The company also states that it does not list securities or offer products to its customers that are securities. In fact, 90% of assets that Coinbase reviews are ultimately not listed on its platform because they do not meet the company’s standards. It has rejected hundreds of assets because they did not meet these standards.

It has also emphasized that its staking services are not securities under any legal standard, including the Howey test, which assesses whether a product is an investment contract. The company first presented its staking services to the SEC in 2019 and had heard no concerns at all from the SEC about its staking services until this investigation.

Coinbase Wallet, on the other hand, is a technology and not an exchange, broker, or centralized platform. The firm has stated that this misunderstanding of crypto products, assets, and services is another example of the need for comprehensive crypto regulation in the U.S. that understands the technology.

Coinbase has repeatedly attempted to engage with the SEC and asked for more regulatory guidance in the crypto industry. However, instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only. It has filed a petition for rulemaking and submitted a comment letter in support of the petition, but the SEC has not provided clarity around its views of staking services and has not given notice to the industry about any concerns.

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