Coinbase (COIN) fell 13% on Tuesday after the U.S. Securities and Exchange Commission (SEC) launched a major lawsuit against the firm for violating securities laws.
Yet the agency isn’t alone: Alabama’s securities regulator is also targeting Coinbase, specifically for its failure to register its staking product.
The Need for Registration
In a separate filing on Tuesday, the Alabama Securities Commission (ASC) announced that it had issued a “Show Cause Order” against Coinbase. The order gives the exchange 28 days to explain why it shouldn’t be ordered to cease and desist from providing its staking services, which the regulator deems to be “unregistered securities.”
The order was part of a “multi-state task force” including ten state securities regulators, representing Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington, and Wisconsin.
“The ASC action does not prohibit Coinbase from offering staking as a service, so long as it complies with Alabama’s laws,” explained the commission. Through proper registration, Coinbase would provide investors with the material information needed to properly assess the risks of staking as an investment contract.
As the commission noted, Coinbase’s nearly 3.5 million nationwide staking accounts are not protected by the FDIC or SIPC, like accounts at banks or traditional brokerage firms.
“This action is another step toward ensuring that investors in crypto asset products are offered the same protections under our laws and are fully aware of the risks involved in these investments,” said ASC Director Amanda Senn.
Staking and Securities
Staking-as-a-service involves letting holders of proof of stake cryptocurrencies stake their assets through Coinbase’s platform. Stakers earn crypto rewards from their respective networks for providing them with economic security, from which Coinbase takes a 25-35% cut of their profits.
Though staking through a centralized exchange isn’t as profitable as staking independently, it’s generally more technically and economically accessible. The Ethereum blockchain, for instance – which became open to staking in September – requires 32 ETH ($60,000) to stake independently, while staking ETH on Coinbase has no minimum.
Per the SEC’s filing on Tuesday, Coinbase has “offered and sold securities without registering its offers and sales,” through its staking program. The agency issued a Wells Notice to Coinbase back in April, which the company suspected at the time would be related to its staking service.