SEC Warns Coinbase of Enforcement Over Its Staking Rewards Products

Coinbase received a Wells Notice from the Securities and Exchange Commission on Wednesday, alleging that the company's staking products constitute unregistered securities. The notice also mentions "aspects of Coinbase's exchange... and Coinbase Wallet."

A person familiar with the matter told Decrypt that Coinbase is "confident it will be able to defend its position in court." The source also said Coinbase leadership is frustrated that the SEC has allowed American investors to participate in crypto for years before "suddenly deciding to pull the rug out."

Coinbase has been having conversations with the SEC about regulatory and policy matters for months, the same person said. Meetings with the regulator started shortly after the company filed a petition with the SEC in July, asking that the SEC begin a public rulemaking process to clarify which digital assets it considers to be securities.

On Monday, the company submitted a letter to the SEC specifically calling for rule-making clarity regarding staking. In the letter, Coinbase chief legal officer Paul Grewal wrote that the company was surprised to see its peer Kraken announce it had reached a $30 million settlement with the SEC over its staking business.

"Until this settlement, the Commission had not conveyed that it might consider staking services to constitute an investment contract and therefore a securities offering requiring registration with the SEC," Grewal wrote. "And the SEC had not previously made this position known despite ample opportunity to engage the crypto industry and its participants with its concerns."

The next day, Coinbase was told to expect a call from the SEC on Wednesday, the source told Decrypt. During that call, the SEC gave notice that it would be pursuing enforcement action against the company.

In a blog post on Wednesday afternoon, Grewal said that the Wells Notice "does not provide a lot of information for us to respond to. The SEC staff told us they have identified potential violations of securities law, but little more." The blog post is entitled, "We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead."

And in a Twitter thread, Coinbase CEO Brian Armstrong pointed out that two years ago the SEC allowed Coinbase to go public on the Nasdaq, even after its S-1 form "included 57 references to staking."

3/ While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.

— Brian Armstrong (@brian_armstrong) March 22, 2023

Earlier on Wednesday, Coinbase had notified users it will suspends Algorand staking rewards on March 29. Last August, after the U.S. sanctioned Ethereum mixing service Tornado Cash and wallets that had used it, Coinbase CEO Brian Armstrong said that if threatened by regulators, he would rather shut down Coinbase staking than censor transactions.

Just last month, Paxos received a Wells Notice from the SEC for its role in issuing and managing the reserves for Binance USD (BUSD). Although the company has said it "categorically disagrees" with the allegations made by the SEC, it still severed its relationship with Binance and stopped issuing BUSD. The company assured customers that BUSD, a U.S. dollar-pegged stablecoin, remains fully backed and will be redeemable through February 2024.

The Coinbase news comes on the same day that the SEC filed a lawsuit against Tron founder Justin Sun and a handful of celebrities, like  Jake Paul and Lindsay Lohan, with violations related to Tron. In a press release, the SEC takes issue with the promotion and sale of Tronix (TRX) and BitTorrent (BTT) tokens, which it described in a press release as unregistered "crypto asset securities."