Coinbase faces SEC investigation on its yield service, product developer: all ETH nodes located overseas, will resist to the end

Amid regulatory scandals involving insider trading and selling unregistered securities, and following a net loss of over one billion US dollars in the second quarter financial report, Coinbase faces another subpoena from the SEC regarding its staking service. However, a developer revealed that all of Coinbase's Ethereum validation nodes are set up overseas and the company will definitely fight against regulators.

Coinbase's Tough Year

In July, Coinbase's former product manager was arrested by the Department of Justice for alleged involvement in multiple insider trading incidents during their tenure.

Simultaneously, the U.S. Securities and Exchange Commission (SEC) claimed that out of 25 cryptocurrencies involved in insider trading cases, at least 9 are considered securities.

In the recently released Q2 financial report, Coinbase reported a net loss of $1.1 billion, with all metrics performing worse than analysts' expectations, compared to a net revenue of $1.59 billion in the same period last year. In a letter to shareholders, they mentioned:

The second quarter was a stress test for crypto companies and a challenging quarter, with extreme market volatility changing user behavior and trading volume, impacting trading revenue but also highlighting the strength of our risk management program.

Following a series of negative news, Coinbase's stock price, which had doubled from $52 to $115 by the end of July to early August, dropped again to $91.97.

Furthermore, the financial report revealed that Coinbase received a subpoena from the SEC for investigation into the listing process, staking program, and revenue products, requiring information on specific user plans, operations, existing and expected product releases, among others, but Coinbase emphasized that this would not have a significant impact on their finances.

However, Delphi Digital consultant Gabriel Shapiro pointed out that regulatory intervention in Ethereum staking mechanisms could lead validators within the U.S. to push for protocol-level regulatory oversight.

Nodes Unable to Avoid Sanctioned Addresses

Gabriel Shapiro stated that Coinbase's Ethereum validation nodes would be unable to filter out addresses and transactions related to U.S. sanctioned entities, which could result in several outcomes:

1. Major node service providers, including Coinbase, would push for a protocol-level review system.
2. Large node service providers would passively submit relevant data to regulatory authorities.
3. Node service providers would achieve significant breakthroughs in regulations, verifying transactions involving sanctioned addresses would not be considered illegal.

Stakers Developer Strikes Back

Twitter user LukeYoungblood.eth claimed to be a developer who assisted Coinbase in establishing staking services, engaging in a Twitter debate with Shapiro, disagreeing with Shapiro's views:

Resisting censorship is one of the primary principles of cryptocurrency, and Coinbase will definitely resist regulation on transaction monitoring. If it doesn't meet expectations, Coinbase will delist staking services.

Shapiro questioned whether Coinbase's removal of the lending product "Coinbase Lend," which was planned amidst an SEC investigation last September, even before reaching the litigation stage, could be considered "resistance" against the SEC?

LukeYoungblood countered:

This is a completely different product. Coinbase received a Wells notice before the launch, and they proved that if it doesn't comply with regulations, Coinbase would rather not offer the product.

Shapiro stated that if, under regulatory pressure, Coinbase chooses to discontinue staking services instead of pushing for protocol-level review, he has no objections.

LukeYoungblood concluded:

This is exactly what I want to emphasize - Coinbase would rather not offer staking services. You may not know that all of Coinbase's Ethereum nodes operate outside the U.S. for tax reasons, so they will resist regulatory scrutiny and reviewing all transactions for U.S. regulatory agencies is overstepping.