Expanding Coinbase Crackdown: U.S. States Intensify Efforts to Halt Staking Product

Regulators from the state of New Jersey have demanded that Coinbase Global, the largest cryptocurrency exchange in the United States, suspend its staking service. This action, along with similar moves by regulators across the country, comes in the wake of the Securities and Exchange Commission (SEC) filing a lawsuit against Coinbase for alleged violations. Both federal and state officials have focused on Coinbase's staking program, which offers customers returns for allowing their tokens to be used in blockchain transactions.

Crypto staking products have become a contentious issue in the regulation of cryptocurrencies, as they can be highly profitable for platforms. While it is not unusual for state regulators to collaborate, the recent coordinated action against Coinbase is significant due to the company's prominence in the market. Shirley Emehelu, New Jersey's Executive Assistant Attorney General, stated that the cryptocurrency securities market cannot be a free-for-all where companies establish their own rules.

Several state regulators emphasized that their actions did not outright prohibit Coinbase from offering staking securities, as long as the company complies with state laws. Amanda Senn, Alabama's securities regulator, welcomed Coinbase to demonstrate why it should be allowed to continue operating its staking products. Alabama issued Coinbase a show-cause order, providing the company with 28 days to justify why its staking products should not be banned in the state.

Authorities in California, Maryland, and Wisconsin demanded that Coinbase immediately cease its staking service and adhere to state laws. Cease-and-desist letters were also issued by Kentucky, New Jersey, and South Carolina. Other states, such as Alabama, Illinois, and Washington, initiated legal action without immediately banning the service, giving Coinbase an opportunity to respond if it wished to continue offering the product.

At the end of 2021, approximately $28.7 billion in cryptocurrency was committed to Coinbase's staking program, according to the SEC's complaint. California residents alone had staked at least $1.28 billion through Coinbase. Overall, Coinbase is the second-largest staking service provider, following Lido, according to data from DefiLlama.

Earlier on the same day, SEC Chair Gary Gensler mentioned on Bloomberg Television that his agency collaborated with ten states to bring the case against Coinbase. The SEC alleged in federal court that Coinbase had been evading its rules for years by enabling users to trade numerous crypto tokens that were actually unregistered securities. Both the SEC and multiple state regulators claimed that Coinbase's staking service amounted to offering a security that should have been registered with the relevant authorities. However, Coinbase has consistently maintained that its program is not illegal.

In response to the state actions, Coinbase's Chief Legal Officer Paul Grewal stated that the company is evaluating the various actions and will comply with any received orders. Grewal mentioned that Coinbase will take advantage of processes available in states to seek more time or challenge the allegations in court before removing its products from the market. He added that the company is confident that its staking products and services are not securities and will utilize all available legal options to defend that position.

Apart from issuing a cease-and-desist order, New Jersey's securities regulator imposed a $5 million fine on Coinbase, while South Carolina issued a $4.3 million penalty. The Secretary of State's Securities Department in Illinois informed Coinbase that a public hearing would be held on August 8 to determine whether the company should be permanently banned from offering and selling securities in the state.

Urska Velikonja, a professor at Georgetown University Law Center, noted that state securities regulators have independent authority, which allows them to pursue their own approaches. As a result, there may be a patchwork of actions where some states await an SEC resolution before taking further steps, while others proceed independently.