The U.S. Securities and Exchange Commission sued Coinbase Global Inc. today in the Southern District of New York, alleging that the cryptocurrency exchange has been operating as an unregistered securities exchange and broker.

The SEC also charged Coinbase over its crypto asset staking rewards program, which it said the company failed to register with the regulator.

The move by the SEC comes after months of indications that the regulator would take action against Coinbase, which is the largest cryptocurrency exchange by volume in the U.S., over its crypto offerings after it issued a Wells notice in March. A Wells notice is a letter noting the conclusion of an investigation noting that the SEC plans to bring an enforcement action against an organization.

According to the SEC’s complaint, during its investigation, the regulator determined that Coinbase has allegedly operated as an exchange, broker and clearing agency without registering with the Commission by law since 2019 and is therefore unlawfully selling crypto assets.

The regulator cited Coinbase’s products such as Coinbase Prime, which Coinbase uses to provide a prime broker for customers to buy and sell assets, and Coinbase Wallet, where users can store and hold their assets. As well as its staking program, Coinbase Earn, allowed investors to earn cryptocurrency by “staking” crypto tokens on blockchains in exchange for rewards.

“We allege that Coinbase, despite being subject to the securities laws, commingled and unlawfully offered exchange, broker-dealer, and clearinghouse functions,” said SEC Chair Gary Gensler. “In other parts of our securities markets, these functions are separate.”

In the SEC’s complaint, the SEC alleged that Coinbase was offering at least 13 different cryptocurrencies that should have been registered as securities including. The crypto assets included the high-speed blockchain Solana or SOL, virtual world assets of The Sandbox or SAND, and the tokens from the popular game “Axie Infinity” or AXS. The two largest cryptocurrencies by market capitalization, bitcoin and Ethereum, were absent from the complaint.

As part of its lawsuit, the SEC is seeking to bar Coinbase from continuing to offer its services and penalize the company for its illegal behavior by recouping what it calls “ill-gotten gains” plus interest and applying penalties.

“The SEC’s reliance on an enforcement-only approach in the absence of clear rules for the digital asset industry is hurting America’s economic competitiveness and companies like Coinbase that have a demonstrated commitment to compliance,” said Paul Grewal, chief legal officer and general counsel of Coinbase. “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”

Also today, the Alabama Securities Commission announced that a multistate task force comprising ten state securities regulators from Alabama, Maryland, New Jersey South Carolina, Vermont, Washington and Wisconsin issued a Show Cause order against Coinbase. The order alleges that Coinbase is in violation of “securities law by offering its staking rewards program accounts to Alabama residents without registration to offer to sell these securities.”

The purpose of the order is to call upon Coinbase to “show cause” within 28 days as to why the company should not be “directed to cease and desist” from offering what Alabama is calling unregistered securities. The order goes on to say that the ASC does not prohibit Coinbase from offering staking as a service, but it wants the company to comply with Alabama laws.

This news follows in the wake of the SEC filing suit Monday against Binance Holding Ltd. and its founding Chief Executive, Changpeng Zhao, with 13 violations of securities laws. Binance is the largest cryptocurrency exchange globally by volume.

In the lawsuit, the SEC alleged that Binance and its affiliate BAM Trading Services Inc., which assists the U.S. version of its cryptocurrency exchange, failed to register as exchange operators and brokers. In particular, the lawsuit claimed that the companies offered for sale unregistered securities, crypto lending products and also targeted the companies’ crypto staking program.

Photo: Coinbase