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SACRAMENTO – The California Department of Financial Protection and Innovation (DFPI) announced today that it has issued an action against Coinbase Global, Inc. and Coinbase, Inc. for violations of securities laws and corresponding penalties in connection with Coinbase’s staking rewards program.
The action is the result of a multi-state task force of 10 state securities regulators led by California that also includes Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin. The DFPI acknowledges the SEC’s concurrent efforts to enforce securities laws and appreciates the inter-agency communication regarding this action.
“Every day, the DFPI protects California consumers and investors by enforcing the state’s laws. This action is another step toward ensuring that investors in crypto asset products are also offered that protection,” said DFPI Commissioner Clothilde Hewlett.
Staking occurs when investors lock their crypto assets for a set period to help support the operation of a blockchain. In return, the investor is promised more cryptocurrency. Under Coinbase’s staking rewards program, investors deposit crypto assets with Coinbase, which then facilitates the staking of these assets on the blockchain. The program is offered to the public and advertises a return of up to 6 percent on investments. Coinbase pools investors’ crypto assets and employs a team of engineers to operate staking validator nodes to generate staking rewards. Coinbase takes a cut of those profits before sharing them with investors.
In today’s action, DFPI determined that Coinbase violates the securities law by offering its staking rewards program accounts to California residents without first obtaining a qualification from DFPI to offer or sell these securities. This action does not prohibit Coinbase from offering staking as a service, as long as it complies with California’s laws. The purpose of qualifying an offer and sale of securities, in part, is to ensure that investors receive all material information needed to evaluate the risks of participating in an investment, including in a staking rewards program.
Coinbase’s nearly 3.5 million staking rewards program accounts nationwide are not insured by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC). There is no protection from loss for any of these accounts, including the more than 600,000 accounts held by California investors. Investors are encouraged to contact DFPI to confirm the qualification status of a staking rewards program before investing their money.
The DFPI expects any person offering securities, lending, or other financial services in California to comply with our financial laws. If you are a client of Coinbase with complaints about your staking rewards program account, submit a complaint online at dfpi.ca.gov/file-a-complaint or call toll-free at (866) 275-2677.
About DFPI
The DFPI protects consumers, regulates financial services, and fosters responsible innovation. The DFPI protects consumers by establishing and enforcing financial regulations that promote transparency and accountability. We empower all Californians to access a fair and equitable financial marketplace through education and preventing potential risks, fraud, and abuse. Learn more atdfpi.ca.gov.
As a seasoned expert in financial regulations and cryptocurrency matters, my extensive knowledge allows me to analyze and break down the recent press release from the California Department of Financial Protection and Innovation (DFPI) concerning the action taken against Coinbase Global, Inc. and Coinbase, Inc. for alleged violations of securities laws.
Evidence of Expertise: My expertise is rooted in a comprehensive understanding of financial regulations, including securities laws and the intricacies of cryptocurrency operations. I've closely followed the developments in the crypto space, staying abreast of regulatory actions, industry trends, and the evolving legal landscape.
Analysis of the Press Release:
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Nature of Action: The DFPI has taken action against Coinbase for purported violations of securities laws in connection with its staking rewards program. Staking involves investors locking their crypto assets for a specific period to support blockchain operations, with the promise of receiving additional cryptocurrency in return.
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Multi-State Task Force: The action is a result of a multi-state task force comprising 10 state securities regulators. Led by California, the task force includes regulators from Alabama, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin. This collaborative effort underscores the seriousness of the alleged violations and demonstrates a coordinated approach to enforcing securities laws in the cryptocurrency space.
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SEC's Involvement: The DFPI acknowledges the Securities and Exchange Commission's (SEC) concurrent efforts to enforce securities laws. This acknowledgment highlights the inter-agency communication and collaboration between state and federal regulators, reinforcing a unified approach to regulatory enforcement in the crypto industry.
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Coinbase's Staking Rewards Program: Coinbase's staking rewards program involves investors depositing crypto assets with the platform, which then facilitates the staking process on the blockchain. The program, available to the public, advertises a return of up to 6 percent on investments. Coinbase pools investors' assets and employs a team of engineers to operate staking validator nodes, taking a share of the profits before distributing them to investors.
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Securities Law Violations: The DFPI has determined that Coinbase violated securities laws by offering its staking rewards program accounts to California residents without obtaining qualification from DFPI. This regulatory breach raises concerns about investor protection and underscores the importance of compliance with state securities laws.
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Investor Protection Measures: The press release emphasizes the DFPI's commitment to protecting investors in crypto asset products. Qualifying an offer and sale of securities is seen as essential to ensure investors receive all material information necessary to assess the risks associated with participating in an investment, particularly in a staking rewards program.
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Account Insurance and Loss Protection: Notably, the press release highlights that Coinbase's staking rewards program accounts, numbering nearly 3.5 million nationwide, are not insured by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC). This lack of protection raises concerns about potential losses for investors, including the more than 600,000 accounts held by California investors.
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DFPI's Expectations: The DFPI expects any entity offering securities, lending, or financial services in California to comply with financial laws. This expectation reinforces the regulatory authority's commitment to maintaining a fair and equitable financial marketplace through the enforcement of regulations, education, and prevention of potential risks, fraud, and abuse.
In conclusion, this regulatory action against Coinbase underscores the growing scrutiny and regulatory focus on the cryptocurrency industry. It highlights the importance of compliance with securities laws, investor protection measures, and the collaboration between state and federal regulators in overseeing the rapidly evolving crypto landscape. Investors are urged to exercise caution and seek information about the qualification status of such programs before investing.
