New Jersey Bureau of Securities Fines Coinbase $5M for Violation of Securities Law

On the same day that the U.S. Securities and Exchange Commission (SEC) filed its lawsuit against Coinbase​, the New Jersey Office of the Attorney General and the Division of Consumer Affairs announced that the state's Bureau of Securities (the "Bureau") issued a Summary Cease and Desist Order against the crypto exchange for violations of the Securities Law and corresponding penalties in connection with Coinbase's staking offerings. The Summary Order assesses a $5 million penalty against Coinbase for the sale of unregistered securities.

In the investigation, the Bureau found that Coinbase violated the Securities Law by offering unregistered securities through its staking offerings to New Jersey residents without first registering these securities. The regulator stated the action does not prohibit Coinbase from offering staking securities, so long as it complies with New Jersey law.

The purpose of registering an offering with the Bureau before the 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 staking securities.As of March 29, 2023, Coinbase's staking securities had more than 3.5 million investors in the US, and not insured by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation. There is no protection from loss for any of the investors in these staking securities, including the approximately 145,270 New Jersey investors as of March 29, 2023.

Shirley Emehelu, Executive Assistant Attorney General, said: "The cryptocurrency securities market is not a free-for-all where companies can make up their own rules. These companies play up the rewards but are less likely to address the risks of investing in crypto and through this action we are making sure they comply with our rules."

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 offerings, investors deposit crypto assets with Coinbase, which then facilitates the staking of those assets on a particular blockchain. The program is offered to the general public and Coinbase advertises a return of up to 10% on investments. Coinbase pools investors' crypto assets and employs a team of engineers to operate staking validator nodes, or contracts with third-party validators, to generate staking rewards. Coinbase takes a cut of those profits before sharing them with investors.

Cari Fais, Acting Director of the Division of Consumer Affairs, said: "The rules are clear. Anyone selling securities in New Jersey must register and comply with the State's Securities Law. The Bureau of Securities will continue to protect investors by monitoring the marketplace to ensure that everyone is following the rules, especially when it comes to the ever-evolving digital asset market."

Amy Kopleton, Acting Bureau Chief, added: "The Bureau protects New Jersey investors by enforcing the State's Securities Law. This action is another step toward ensuring that investors in crypto asset products are also offered that protection."

The action was led by the California securities regulator and jointly investigated by state task forces in several other states.