Alabama and nine other states issued a show cause order to the crypto asset company Coinbase, Inc. and its parent corporation Coinbase Global, Inc. this week.

According to the Alabama Securities Commission (ASC), the order gives Coinbase 28 days to show why it should not be directed to cease and desist from selling unregistered securities in Alabama. 

The show cause order alleges that Coinbase violates the securities law by offering its staking rewards program accounts to Alabama residents without registration to offer or sell these securities. 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 crypto assets.

Under Coinbase's staking rewards program, investors deposit crypto assets with Coinbase, which then facilitates the staking of these assets on the blockchain. The program is offered to the public and advertises a return of up to 6% on investments. Coinbase pools investors' crypto assets and employs a team to generate staking rewards. Coinbase takes a cut of those profits before sharing them with investors.

Ratings agency Moody's changed Coinbase's outlook from "stable" to "negative" this week after the Securities and Exchange Commission alleged that the exchange operated as an unregistered broker and sold unregistered securities since 2019.

Moody's decision to change the outlook stems from uncertainty about how much the SEC's charges will affect Coinbase's business model and cash flows, the agency said in a statement published Thursday.

According to ASC, the action does not prohibit Coinbase from offering staking as a service as long as it complies with Alabama's laws.

"The ASC is committed to protecting Alabama consumers and investors, including those who choose to invest in the decentralized finance space. This action is another step toward ensuring that investors in crypto asset products are offered the same protections under our laws and are fully aware of the risks involved in these investments," ASC Director Amanda Senn said in a statement.

Coinbase'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). There are about 33,000 of these accounts currently held by Alabama investors, according to ASC.

The action is the result of a multi-state task force of ten state securities regulators that includes Alabama, California, Illinois, Kentucky, Maryland, New Jersey, South Carolina, Vermont, Washington and Wisconsin.

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