Coinbase, a cryptocurrency exchange platform, saw a 13% fall on Tuesday following a lawsuit filed by the US Securities and Exchange Commission (SEC). The regulatory agency accused Coinbase of violating securities laws. However, the SEC is not the only regulator charging Coinbase. The Alabama Securities Commission (ASC) has also targeted Coinbase for its failure to register its staking product. The ASC issued a “Show Cause Order” against Coinbase, giving the exchange 28 days to explain why it should not be ordered to stop providing its staking services, which the regulator considers “unregistered securities.” The order was part of a “multi-state task force” comprising ten state securities regulators from Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.
The ASC’s action does not prevent Coinbase from offering staking as a service, provided it follows Alabama’s laws by registering and providing investors with the necessary information to evaluate the risks of staking as an investment contract. Coinbase’s 3.5 million staking accounts are not protected by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC), like accounts in banks or traditional brokerage firms.
ASC Director Amanda Senn said, “This action is another step toward ensuring that investors in crypto asset products are offered the same protections under our laws and are fully aware of the risks involved in these investments.”
Staking-as-a-service is a process that allows holders of proof-of-stake cryptocurrencies to stake their assets through Coinbase’s platform. Stakers earn crypto rewards from their respective networks for providing them with economic security, from which Coinbase takes a 25-35% cut of their profits. Although staking through a centralized exchange is less profitable than staking independently, it is generally more accessible and easier to operate. The Ethereum blockchain, for example, which became open to staking in September, requires 32 ETH ($60,000) to stake independently, while staking ETH on Coinbase has no minimum.
According to the SEC’s filing on Tuesday, Coinbase has “offered and sold securities without registering its offers and sales” through its staking program. The agency issued a Wells Notice to Coinbase in April, which the company suspected would be related to its staking service.
Coinbase is facing legal challenges from the SEC and the ASC for violating securities laws and failing to register its staking product, respectively. The ASC has given Coinbase 28 days to respond to its “Show Cause Order” and explain why it should not be ordered to cease and desist from providing its staking services. Coinbase’s staking accounts are not FDIC or SIPC-protected, and the ASC’s action aims to ensure that investors in crypto asset products have the same protections under the law and are fully aware of the risks involved in these investments.