After Binance — Coinbase charged with unregistered operations
The Securities and Exchange Commission (SEC) has filed charges against Coinbase, Inc, the crypto-asset trading platform, for operating as an unregistered national securities exchange, broker, and clearing agency. Additionally, Coinbase is accused of failing to register its crypto asset staking-as-a-service program offering. As the SEC ramps up its approach to crypto businesses following the earlier charges brought against Binance, compliance teams should take note of the following key details:
The SEC alleges that since at least 2019, Coinbase has facilitated the buying and selling of crypto asset securities without registering its platform. Coinbase is accused of conducting exchange, broker, and clearing agency functions without adhering to the necessary regulatory requirements. The company’s actions include bringing together buyers and sellers, executing securities transactions, and providing settlement services for customers. By operating without registration, Coinbase allegedly deprived investors of essential safeguards and oversight provided by the SEC.
Coinbase’s staking-as-a-service program, which allows customers to earn profits through blockchain transaction validation, is also under scrutiny. The SEC claims that Coinbase has conducted an unregistered securities offering through this program since 2019. By pooling customers’ stakeable crypto assets, staking the pool, and distributing rewards, Coinbase allegedly violated securities offering registration requirements.
SEC Chair Gary Gensler emphasized Coinbase’s failure to separate exchange, broker-dealer, and clearinghouse functions, which are typically treated as distinct entities in the securities markets. He noted that Coinbase’s actions denied investors critical protections against fraud, manipulation, conflicts of interest, and lacking routine inspections. The SEC seeks to hold Coinbase accountable for its non-compliance, aiming for injunctive relief, disgorgement of ill-gotten gains, penalties, and other equitable remedies.
Gurbir S Grewal, Director of the SEC’s Division of Enforcement, stressed that ignoring rules due to personal preference can have severe consequences for the investing public. Coinbase’s deliberate decision to disregard the securities laws, according to Grewal, deprived investors of essential protections.
The SEC’s charges against Coinbase shed light on the importance of compliance within the cryptocurrency industry. Compliance professionals must prioritize transparency, regulatory adherence, and investor protection to build trust and sustainability. By establishing proper registration, implementing robust controls, and promoting accountability, compliance professionals can mitigate risks and contribute to the long-term success of the industry.
CFTC Chair calls for greater digital regulation
The chairman of the Commodity Futures Trading Commission (CFTC) has called for federal regulation of the digital commodity market. In testimony before Congress, Chairman Rostin Behnam said that the current lack of regulation leaves consumers vulnerable to fraud and manipulation.
Behnam pointed to recent events, including the bankruptcy of several large digital asset platforms and the alleged manipulation of trading activity, as evidence of the need for regulation. He also said that the digital asset market is often promoted as a form of financial inclusion, but that it can be predatory to those who are most vulnerable.
Behnam said that any federal regulation of the digital commodity market should include the following key provisions:
- Customer protections: Congress should ensure that the CFTC is fully empowered to require registered entities to make necessary disclosures regarding a variety of matters, such as investment risk, cybersecurity risks, mining, settlement practices and other related activities. The CFTC should also be able to require that customers are receiving the best available prices, and that assets are segregated and safeguarded in a way that protects customers in the event of a failure by the platform.
- Market integrity: The CFTC should be given the authority to proactively establish rules to minimize fraud in the digital commodity market. This should include authority to set stringent standards for preventing conflicts of interest, establish rules for maintaining fair, open, and transparent markets, and actively monitor trading by market participants.
- Funding: The CFTC is the only financial market regulator that relies on appropriated dollars from Congress for its funding. Other financial regulators have self-funding mechanisms in place that provide greater assurance that their fiscal year budget requests will be fully funded. For any regulator taking on new authority, it is imperative that the Congress provide the resources necessary to implement that new authority. Regulation of the digital commodity market will bring new responsibilities to the CFTC that cannot be managed by simply folding this market into our existing regulatory regime with existing resources.
Behnam said that he is encouraged by the continued interest of both parties in Congress and the Administration to address the regulatory gap over digital commodities. He said that he stands ready to engage with Congress and members of the Administration to ensure that any federal regulation of the digital commodity market addresses all key considerations in this emerging marketplace.
Australia looks to overhaul payment system regulation
The Australian government has announced two consultation papers as part of its proposed changes to the Payments Systems (Regulation) Act 1998 (PSRA).
The Reforms to the Payment Systems (Regulation) Act 1998 consultation paper outlines proposals to update the Payment Systems (Regulation) Act 1998 (PSRA) to ensure regulators and Government can address new risks related to payments as the provision of payments evolves and increases in complexity. It also sets out options to expand the regulatory tools available to regulators to effectively address new and emerging risks. Responses are requested by 7th July.
The Payments System Modernization (Licensing: Defining Payment Functions) consultation paper intends to seek input into the list of payment functions that are intended to underpin a new licensing framework for payment service providers (PSPs) and invites feedback on the foundations of a new tiered, risk-based licensing framework for PSPs, based on a defined list of payment functions and reflecting the recommendations of the Review of the Australian Payments System (Payments System Review) from June 2021. Responses to this paper are requested by 19th July.
The government has also issued a strategic plan document outlining the proposals and the subsequent steps. Its focus is on four key principles: trustworthiness; accessibility; innovation and efficiency and the plan also expands on additional steps to the consultation papers above, including, amongst other proposals:
- establishing the National Anti-Scam Center, and consulting on options for developing new industry codes across sectors, including for banks, telecommunications, and digital platforms in 2023.
- releasing its Cyber Security Strategy 2023-2030 in 2023
- extending the Reserve Bank of Australia’s supervision from systemically important systems to also include prominent payment systems, i.e. NPP, Visa, Mastercard and eftpos.
- Releasing a consultation paper on the future of check use in Australia, and the support required to retire the checks system, by the end of 2023.
Joint Regulatory Oversight Committee sets out next steps to help UK open banking grow
The Joint Regulatory Oversight Committee (JROC: comprising the Financial Conduct Authority and the Payment Systems Regulator, HM Treasury and the Competition and Markets Authority) has revealed an ambitious program of work aimed at advancing the recommendations for the next phase of open banking in the United Kingdom. This strategic plan includes the establishment of dedicated workstreams to address the six key themes and priorities outlined in the recommendations. To facilitate this initiative, the JROC has launched two new working groups focused on variable recurring payments (VRP) and the future open banking entity. Additionally, Open Banking Limited (OBL) has been entrusted by the JROC to lead and coordinate workstreams related to four other vital themes.
A selected summary of key developments for regulated financial institutions
Access all of our daily regulatory content by using the login button below.
To find out more about how CUBE can help your business click here.