STATE OF ILLINOIS

SECRETARY OF STATE
SECURITIES DEPARTMENT

IN THE MATTER OF:

) File No. 2300225
COINBASE, INC. and
COIN BASE GLOBAL, INC. )

NOTICE OF HEARING

TO THE RESPONDENT: Coinbase, Inc.
c/o Illinois Corporation Service Company
801 Adlai Stevenson Drive
Springfield, IL 62703

Coinbase Global, Inc.

c/o Corporation Service Company
251 Little Falls Drive,
Wilmington, DE 19808

You are hereby notified that pursuant to Section 11.F of the Illinois
Securities Law of 1953 [815 ILCS 5/1 et seq.] (the "Act") and 14 III. Adm.
Code 130, Subpart K, (the "Code") a public hearing will be held at 69 W.
Washington Street, Suite 1220, Chicago, Illinois 60602, on the 8th day of
August, 2023, at the hour of 10:00 AM, or as soon as possible thereafter,
before Hearing Officer James L. Kopecky or any such other duly designated
Hearing Officer of the Secretary of State.

Said hearing will be held to determine whether an Order shall be entered

to permanently prohibit Respondents Coinbase, Inc. and Coinbase Global, Inc.
from offering and selling securities in or from the State of Illinois, and/or
granting such other relief as may be authorized under the Act, including but
not limited to imposition of a monetary fine in the maximum amount of
$10,000 per violation pursuant to 11.E(4) of the Act.

The grounds for such proposed action are as follows:

 NATURE OF THE CASE

From as early as November 6, 2019, to present, Respondents offered

and sold unregistered securities (the "Coinbase Staking Offerings," each a
"Coinbase Staking Offering") nationwide and to Illinois residents in the form
of an investment contract involving "staking." Staking is the strategic pledging
of digital assets to confirm transactions in exchange for potential payment.

In Coinbase Staking Offerings, Respondents centralize investors' digital

assets and deploy them to profit from staking opportunities. Respondents take
a percentage of the profits and distribute the remainder to investors.

As of March 29, 2023, there were 140,436 Illinois accounts collectively

holding investments in Respondents' Coinbase Staking Offerings totaling over
two hundred twenty-eight million dollars ($228,000,000).

DIGITAL ASSET AND STAKING OVERVIEW

1. The digital assets referred to herein are assets that are used to transact
and store value over the internet using encryption algorithms.

2. Digital assets rely upon distributed ledger or "blockchain" technologies

that serve as peer-to-peer databases spread across a network of
, computers to record all transactions in that digital asset, i.e., a virtual
accounting system.

3. Embedded within each digital asset's blockchain is a unique and complex

protocol to "validate" the digital asset's occurring transactions.

4. For digital assets that use a "proof-of-stake" blockchain, transactions

are added to the blockchain by "validators." A validator is a participant
in a proof-of-stake blockchain network that is responsible for validating
new transactions and maintaining the security of the blockchain by
storing the complete and accurate history of transactions and confirming'
the validity of new transactions added to the next "block" in the "chain".

5. Validators must commit or "stake" their digital asset to participate and

validate transactions.

6. Participation as a validator in a proof-of-stake blockchain requires a

minimum amount of a digital asset staked, technical knowledge, and
specific computer hardware and software.

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7. There are expansive security considerations and a risk of loss of staked
digital assets associated with participating as a validator because
downtime or failure to comply with blockchain protocol can cause a
validator's stake to be taken as a penalty enforced at the protocol level
and not returned.

RESPONDENTS

8. Respondent Coinbase, Inc. is a Delaware corporation and is registered

as a foreign entity in Illinois with Illinois Corporation Service Company
serving as its registered agent, and an address of 8101 Adlai Stevenson
Drive, Springfield, IL 62703. Coinbase, Inc. was founded in 2012.

9. Respondent Coinbase Global, Inc. is a Delaware corporation with

Corporation ServiCe Company serving as its registered agent, and an
address of 251 Little Falls Drive, Wilmington, DE 19808. In January of
2014, Coinbase Global, Inc. was established as a parent company. By
April of 2014, Coinbase, Inc. became a wholly owned subsidiary of
Coinbase Global, Inc. As such, Respondent Coinbase Global, Inc. is a
"controlling person" with respect to Coinbase Inc., as that term is
defined in Section 2.4 of the Act. 815 ILCS 5/2.4.

10. Respondents operate a digital asset financial services company through

online and smartphone application platforms, offering financial products
and services to retail and institutional customers, including, but not
limited to, profit-seeking "staking" offerings, collateralized loans,
custodial services, exchange trading services, and trade clearing
services.

11. Respondents maintain a website (https://www.coinbase.com) and a

smartphone application ("Coinbase") available for download on Android
(Google Play Store) and iOS (App Store). The website and application
are available to the public at large, including Illinois residents.

COIN BASE STAKING OFFERINGS

12. In Coinbase Staking Offerings, Respondents consolidate digital assets of

many individuals, and seek to capitalize on this centralization of digital
assets to increase the overall profits of the staking offerings.

13. Respondents offer the Coinbase Staking Offerings to the public at large,
including Illinois residents, through their smartphone application and
 public website; prospective investors can open accounts on either
platform. The public website is https://www.coinbase.com/earn.

14. To invest, individuals select a Coinbase Staking Offering, deposit (or

purchase from Respondents' platform) the designated digital asset into
their accounts with Respondents and maintain a minimum amount in
Respondents' custody.

15. Respondents then, in their sole and absolute discretion, control how
those assets are "staked" by:

a. Pooling investors' digital assets into accounts controlled

•by Respondents;
b. Performing operations to configure computer hardware and
software to support validators on the relevant blockchain
network;
c. Bonding investors' pooled digital assets to act as a
validator (or validators) for any period of time. These
operations may be conducted for multiple investors in a
single transaction. These transactions typically incur fees
initially borne by Respondents;
d. Operating or engaging third parties, including the possibility
of a related-party, namely Coinbase Cloud, to operate as a
validator;
e. Receiving and holding the profits of successful staking, and
reinvesting profits earned;
f. After taking a percentage of the profits, accounting for and
distributing profits to investors' accounts; and,
g. Addressing investors' liquidity needs by determining when,
how, and why to draw down or stop validating. For example,
because of the pooled nature of digital assets in Coinbase
Staking Offerings as well as validating, an investor cannot
necessarily liquidate their "staked" asset. Further,
Respondents decision when to stop validating may be
dependent upon surging digital asset transaction fees.

16. Respondents earn and share profits with investors in the Coinbase
Staking Offerings through revenue from its business activities, including
operating as validators to verify and secure transactions on proof-of-
stake blockchains. Investors neither provide nor facilitate these
activities or services.

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17. As of. June 5, 2023, Respondents' website represents investors can earn
up to a 10% annual percentage yield through the Coinbase Staking
Offerings.

18. As of March 2, 2023, Respondents' profit share from each Coinbase

Staking Offering ranges from 15 to 35%, depending upon the digital
asset staked and whether an investor has a preferred status ("Coinbase
One" membership).

19. Respondents attract investors who may not otherwise have the
resources and ability to "stake" on their own and operate as "validators."

20. Respondents represent that they can generate more consistent returns
on staking activities by pooling investor assets to deploy validators more
efficiently in greater numbers across protocols.

21. Respondents have represented to investors that participating in the

Coinbase Staking Offerings is easy because investors can start earning
"with a couple of clicks," and that it's secure because Respondents "take
measures to mitigate risk and allow [investors] to opt-out anytime," and
that "[the investor] shouldn't have to be an expert" digital asset trader
to grow digital asset wealth.

22. Regarding a Coinbase Staking Offering of the digital asset "Tezos,"

Respondents stated:

"With today's launch, Coinbase is offering an easy, secure way for

anyone to actively participate in the Tezos network. While it's
possible to stake Tezos on your own or via a delegated staking
service, it can be confusing, complicated, and even risky with
regard to the security of your staked Tezos. We're changing that
with staking rewards on Coinbase."

23. Investors' risks include, but are not limited to, the following:

a. Respondents' credit worthiness;

b. Network failure, which may result in loss of staked digital
assets or profits;
c. Validator failure, which may result in loss of staked digital
assets or profits;
d. Cyber attacks given the nature of digital assets;
a Market events affecting the value of their staked assets for
a designated lock-up period. Per the Coinbase Website:
"Staking requires assets to be locked on the protocol in

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 order to earn rewards. During this time you won't be able to
trade or transfer your assets."; and,
f. Conflicts of interest between Respondents and investors.

24. As demonstration of the risks involved and Respondents' absolute

control, as recently as May 16, 2023, Respondents suspended
withdrawals to investors in a Coinbase Staking Offering. Despite citing
only a "minor" technical issue, Respondents estimated withdrawals to
be suspended for 48 to 72 hours.

25. Whether investors in the Coinbase Staking Offerings receive profits

depends entirely on the success of Respondents as a business and its
managerial and entrepreneurial efforts. Investors do not engage in any
substantive or meaningful program activities beyond depositing digital
assets.

26. As of mid-January 2023, Respondents have at least 64 engineers to

manage the technical requirements to generate revenue for the
Coinbase Staking Offerings. Additionally, Respondents utilize at least 60
additional engineers of a related-party, Coinbase Cloud, to provide
technical support to validator operations.

27. The gross revenue Respondents have generated from the Coinbase
Staking Offerings has grown approximately 315,429% from 2019 to
2022:

Year Gross Revenue

2019 $80,094

2020 $8,849,724

2021 $172,097,036

2022 $252,719,520

2023 (through $44,955,171

2/28/23)

28. From as early as November 6, 2019, to present, Respondents have

offered and sold the Coinbase Staking Offerings to Illinois residents.

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29. As of March 29, 2023, 140,436 Illinois accounts had active investments
in the Coinbase Staking Offerings; these accounts collectively held
investments totaling over two hundred twenty-eight million dollars
($228,000,000).

SECTION 12 VIOLATIONS OF ILLINOIS SECURITIES LAW

(815 ILCS 5/12)
Offer and Sale of Unregistered Securities

30. The Department repeats and realleges Paragraphs 1 through 29 as if

fully stated herein.

31. Coinbase Staking Offerings are securities, as they are investment

contracts.

32. Under Section 2.1 of the Act, the definition of a security includes any
investment contract. 815 ILCS 5/2.1.

33. In Illinois, "investment contract" is defined in Section 130.201 of the

Code:

"Investment contract" shall include, but not be limited to:

a) any interest or participation in a contract, transaction, scheme,

common enterprise, or profit-seeking venture whereby the investor
transfers capital to the promoter or promoters thereof or invests therein
and looks to the promoter or proMoters for the success of the venture;

b) any interest as a limited partner in a limited partnership;

c) any investment with regard to completion costs of any oil, gas, or

other mineral lease, right or royalty; and

d) any enterprise or venture whereby the investor is solicited to transfer

initial capital to an enterprise on the promise or inducement that a value
or benefit will accrue to the investor from the enterprise where the
investor's capital is placed at risk by the enterprise and the investor
asserts no managerial or operational control over the enterprise.

34. The purpose of the Act is to protect innocent persons who may be
induced to invest in speculative enterprises over which they have little
or no control. To effectuate the Act's paternalistic goals, it should be

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 given a liberal construction and courts construe the term "security"
broadly. Van Dyke v. White, 2019 IL 121452, 47. (citations omitted).
The maxim of liberal construction means that courts should accept and
follow the law's spirit instead of limiting it to its letter as in derogation
of the common law. Boatmen's Bank of Benton v. Durhath, 203 III. App.
3d 921, 926, 148 III.Dec. 900 (1990). (citation omitted).

35. Thus, the substance of the transaction, the relationship between the
parties, and economic reality determine whether a transaction involves
a security and whether a purchaser is entitled to protection afforded by
registering or reporting an instrument pursuant to securities laws.
Boatmen's Bank at 927. (citation omitted).

36. The Coinbase Staking Offerings described above and opted into by
Illinois residents constitute the offer and sale of securities as those
terms are defined under Sections 2.1, 2.5, and 2.5a of the Act.

37. Section 5 of the Act provides, inter alia, that all securities except those
ekempt under Section 3 or those offered or sold in transactions exempt
under Section 4 "Shall be registered either by coordination or
qualification prior . . . to their offer or sale" in the State of Illinois.

38. At all relevant times herein, Respondents failed to file with the Secretary
of State an application for registration of the securities described above.

39. At all relevant times herein, Respondents failed to file any notice of
filings with the Secretary of State claiming that the securities being
offered above were exempt from registration.

40. Section 12.A of the Act provides that it shall be a violation for any person
"To offer or sell any security except in accordance with the provisions of
this Act."

41. Section 12.D provides that it shall be a violation for any person "To fail
to file with the Secretary of State any application, report or document
required to be filed under the provisions of this Act or any rule or
regulation made by the Secretary of State pursuant to this Act..."

42. By virtue of the foregoing offer and sale of unregistered securities, the
Coinbase Staking Offerings, Respondents violated Sections 12.A and
12.D of the Act.

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 Delivery of this Notice of Hearing to the designated representative of
the Respondent constitutes service upon such Respondent.

Date of Mailing: June 6, 2023

AggrGIANNOULIAS
Secretary of State
State of Illinois

You are further notified that you are required pLirsuant to Section
130.1104 of the Code to file an answer to the allegations outlined above within
thirty (30) days of the receipt of this Notice. A failure to do so within the
prescribed time shall be deemed an admission of the allegations contained in
the Notice of Hearing and waives your right to a hearing.

Furthermore, you may be represented by legal counsel; may present

evidence; may cross-examine witnesses and otherwise participate. A failure
to appear shall constitute default by you.

You may be represented by legal counsel, present evidence, cross-

examine witnesses and otherwise participate. However, a failure to appear
shall constitute default.

A copy of the Code promulgated under the Illinois Securities Law and
pertaining to hearings held by the Office of the Secretary of State, Illinois
Securities Department, are available at the Department's website:
https://www.ilga.govicommission/jcar/admincode/014/01400130sections.ht
ml.

Attorneys for the Secretary of State:

Catherine M. Malloy
[email protected]
Peter S. Coorlas, Jr.
[email protected]
John Paul Simon
[email protected]
Office of the Secretary of State
Illinois Securities Department
69 West Washington Street, Suite 1220
Chicago, Illinois 60602
(312) 793-3649

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Hearing Officer:
James L. Kopecky
Kopecky Schumacher Rosenburg LLC
120 N. LaSalle St., Suite 2000
Chicago, IL 60602
(312) 380-6552
[email protected]

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