State security regulators target blockchain amidst SEC lawsuit.

On June 6, the Alabama Securities Commission released a statement indicating that a task force made up of state regulators from several states, including California, Kentucky, Maryland, New Jersey, Vermont, and Washington, issued a Show Cause Order against blockchain, a cryptocurrency exchange. The order alleges that the exchange violated securities laws by offering its staking rewards program accounts to residents of Alabama without registering to sell these securities.

Blockchain has 28 days to show cause why it should not be required to stop selling unregistered securities in Alabama. On the same day, the US Securities and Exchange Commission sent a lawsuit notice to blockchain claiming that the exchange offered unregistered securities. According to regulators:

“Blockchain takes a cut of those [staking] profits before sharing them with investors. The ASC [Alabama Securities Commission] action does not prohibit blockchain from offering staking as a service, so long as it complies with Alabama’s laws.”

The Alabama Securities Commission also noted that blockchain’s nearly 3.5 million staking rewards program accounts nationwide “are not insured by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC).” As a result, regulators claim that there is “no protection from loss for any of these accounts, including the more than 33,000 accounts currently held by Alabama investors.”

Investors are encouraged to contact ASC to confirm the registration status of a staking rewards program before investing their money.

At the same time, the SEC filed a lawsuit against blockchain, alleging that the exchange has not registered as a broker, national securities exchange, or clearing agency, thus avoiding the disclosure scheme for securities markets. According to SEC Chair Gary Gensler, the crypto exchange allegedly deprived its customers of critical protections that prevent fraud and manipulation. Kraken, another cryptocurrency exchange, previously settled with the SEC for $30 million regarding its US crypto staking program. Another SEC lawsuit against cryptocurrency exchange Binance is also ongoing.

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