California Issues Desist Order against Coinbase amidst SEC Lawsuit

Coinbase’s regulatory troubles worsened on Tuesday as California's Department of Financial Protection and Innovation ordered the leading US cryptocurrency exchange to 'desist and refrain' from offering its crypto staking programme to residents in the state. The state watchdog noted that the exchange has been offering the service without prior permission and in violation of state laws.

According to the regulator, at least 644,470 California residents were active investors in Coinbase's crypto staking-as-a-service programme as of March 29 this year. These investors held over $1.2 billion in investments.

Alabama's Regulator Questions Coinbase

On the other hand, Alabama's state securities watchdog on Tuesday alleged that the crypto exchange violated securities law by offering its staking rewards programme to state residents without registration. The Alabama Securities Commission (ASC) in a statement noted that it had issued a ‘show cause’ order to Coinbase in partnership with nine other state watchdogs.

The order gives Coinbase 28 days to defend why it should not be slammed with a cease-and-desist order for selling unregistered securities in Alabama. The nine other securities regulators involved in the order are from California, Illinois, Kentucky, Maryland and New Jersey. Also included are state regulatory authorities from South Carolina, Vermont, Washington and Wisconsin.

The latest actions come hours after the Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, alleging that the exchange operates an illegal trading platform and runs a crypto staking-as-a-service programme without authorization. In addition, the SEC took an aggressive stance against Binance earlier on Monday, accusing the world's largest cryptocurrency exchange of operating illegal trading platforms in the United States, offering unregistered crypto asset securities and commingling customers’ funds.

According to the ASC, Coinbase manages about 3.5 million staking rewards programme accounts across the United States. However, these accounts are neither insured by the Federal Deposit Insurance Corporation (FDIC) nor the Securities Investor Protection Corporation (SIPC).

“There is no protection from loss for any of these accounts, including the more than 33, 000 accounts currently held by Alabama investors,” the state securities watchdog said.

However, the ASC clarified that its action is not directed at preventing Coinbase from offering crypto staking to users in the state but to ensure compliance with the state’s laws through registration.

“The purpose of registering 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 programme,” the regulator explained.

The state regulators' actions are the latest in a regulatory pushback against crypto firms offering digital assets that are considered unregistered securities by US regulators through crypto staking offerings or programmes. Earlier in February, the crypto exchange, Kraken shut down its staking service after reaching a $30 million settlement with the SEC.

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