Coinbase Custody broker-dealer previously charged with putting customer assets at risk

Coinbase’s new solution for institutional investors launched yesterday to great fanfare. It offers solutions for long-awaited institutional money to flow into the market.

Electronic Transaction Clearing [ETC], the registered broker-dealer through which Coinbase aims to conduct transactions, was charged by the US Securities and Exchanges Commission [SEC], earlier this year. The charges against it were that it violated the Securities Exchange Act and Customer Protection Rule as well as other related rules by placing $25 million of customers’ securities at risk.

The Customer Protection Rule is intended to safeguard the customer’s cash and securities to be returned in case of the broker-dealer failing. The rule requires broker-dealers to maintain control or physical possession of customers’ paid and excess margin securities.

The release on this matter stated:

“ETC improperly transferred almost $8 million of fully paid securities belonging to cash customers to an account at another clearing firm to meet margin requirements on borrowed funds, and the firm used more than $17 million of securities of two customers to borrow funds without consent.”

ETC neither admitted nor denied the SEC’s findings, paid a penalty of $80,000 and agreed to cease and desist from committing or causing similar violations in the future. It is to be noted that they cooperated with the SEC’s findings.

On the matter, Michele W. Layne, the Director of SEC L.A. Regional Office, said:

“The SEC has brought several recent cases charging violations of the Customer Protection Rule, which establishes critical protections to ensure that investors’ securities are kept safe by broker-dealers. As this case shows, no broker-dealer is allowed to use its customers’ securities to fund its own operations.”

User Tyrell Cobb said:

“Coinbase is now Boa/JPMorgan Chase/Wells Fargo + Goldman Sachs combined, if those institutions had de-facto monopolies in their areas. The irony of where crypto is now at.”

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