The New Jersey Office of Securities has issued a summary cease and desist order against major cryptocurrency exchange Coinbase, Inc. for allegedly offering unregistered securities linked to its cryptocurrency staking services. The Bureau has further imposed a hefty $5 million fine against Coinbase.

This action was led by the New Jersey Attorney General’s Office and the Division of Consumer Affairs, with the goal of enforcing the Securities Law. The violation concerns Coinbase’s promotion of unregistered securities to New Jersey residents through its staking services. However, this order does not prevent Coinbase from offering staking services, as long as it aligns with New Jersey law.

Staking is a process in which investors pledge their crypto assets for a specified period to help validate blockchain transactions, and in return receive additional cryptocurrency. Coinbase’s staking program, which promises returns of up to 10%, is under scrutiny. Coinbase pools investors’ crypto assets and uses a team of engineers or contracts with third-party validators to generate staking rewards. These profits are then shared with investors after the Coinbase cut.

“Businesses cannot make their own rules in the cryptocurrency stock market. They must properly address the risks of investing in cryptocurrency,” said Shirley Emehelu, executive deputy attorney general. Cari Fais, acting director of the Division of Consumer Affairs, stressed the need to register anyone who sells securities in New Jersey.

Coinbase staking securities are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation. More than 3.5 million investors nationwide, including approximately 145,270 New Jersey investors, are not protected against loss.

This legal action is the culmination of a collaborative investigation by state securities regulators, led by California and including many other states.

In addition, the US Securities and Exchange Commission (SEC) has also commissioned Coinbase to operate as an unregistered stock exchange, broker, and clearing agency. This one-two punch of regulatory issues has sparked a severe market reaction, with Coinbase’s stock price plunging more than 20%.

The Office reiterated its commitment to protect investors from investment fraud and to ensure the regulated operation of the securities industry in New Jersey.