Coinbase Faces $5M Penalty from New Jersey Securities Bureau and SEC Charges, Stock Tumbles 20%

The New Jersey Bureau of Securities has issued a Summary Cease and Desist Order against leading cryptocurrency exchange Coinbase, Inc. for allegedly offering unregistered securities tied to its cryptocurrency staking services. The Bureau has further levied a hefty penalty of $5 million against Coinbase.

This action was led by the New Jersey Office of the Attorney General and the Division of Consumer Affairs, aiming to enforce compliance with Securities Law. The violation pertains to Coinbase's promotion of unregistered securities to New Jersey residents through their staking services. However, this order does not prevent Coinbase from offering staking services, as long as it aligns with New Jersey law.

Staking is a process where investors commit their crypto assets for a specified period to aid blockchain transaction validation, and in return, receive additional cryptocurrency. Coinbase's staking program, which promises returns up to 10%, is under scrutiny. Coinbase pools the investors’ crypto assets and uses a team of engineers or contracts with third-party validators to generate staking rewards. These profits are then shared with investors after Coinbase's cut.

"Companies cannot make up their own rules in the cryptocurrency securities market. They need to properly address the risks of investing in crypto," stated Shirley Emehelu, Executive Assistant Attorney General. Cari Fais, Acting Director of the Division of Consumer Affairs, emphasized the necessity of registering anyone selling securities in New Jersey.

Coinbase's staking securities are not insured by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation. Over 3.5 million investors across the country, including approximately 145,270 New Jersey investors, are not shielded from loss.

This legal action is the culmination of a collaborative investigation by state securities regulators, led by California and inclusive of multiple other states.

Further, the U.S. Securities and Exchange Commission (SEC) has also charged Coinbase with operating as an unregistered securities exchange, broker, and clearing agency. This double whammy of regulatory trouble has caused a severe reaction in the market, with Coinbase's stock price plunging more than 20%.

The Bureau reiterated its commitment to protect investors from investment fraud and ensure the regulated operation of the securities industry in New Jersey.