Author: MOLLY WHITE Compiler: Cointime Lu Tian
The day after the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Binance, Coinbase was also sued by the SEC. The explanation and overview of the Coinbase case has been sufficient, so I am not going to repeat them. However, I want to explore in more depth some of Coinbase’s PR, legal, and strategic aspects in its fight with the SEC.
Coinbase is considered a "legal" cryptocurrency exchange in the United States and is known for its conservative listing strategy in terms of the assets that can be traded on its platform. The company was founded in 2012, has a BitLicense from the New York Department of Financial Services, and was listed on the Nasdaq in April 2021. Coinbase has always strictly followed regulations and claims to actively cooperate with US regulators and hold regular meetings.
However, over the past few years, Coinbase has taken an increasingly tough stance toward the SEC and its chairman, Gary Gensler, and the conflict between the two sides has intensified.
In July 2022, the company filed a rulemaking petition asking the SEC to develop and adopt customized rules for the cryptocurrency industry. According to Coinbase, the technological innovation behind cryptocurrencies represents a "paradigm shift in existing market practices, rendering many Commission rules governing the issuance, sale, trading, custody, and clearing of traditional assets incomplete and inappropriate for securities in such markets." They believe that the 1930s legislation that still supports U.S. securities laws can no longer meet the needs of cryptocurrency regulation.
In March 2023, Coinbase filed an amicus brief in a case against a former Coinbase product manager and his associates, in which they disputed the SEC’s assertion that several cryptocurrency tokens listed on Coinbase were securities.
In April, Coinbase filed a petition for a writ of execution urging the court to compel the SEC to respond to a petition it filed less than a year ago, claiming that the SEC had already made a decision to deny it but had not yet made the decision public.
Coinbase and its executives accused the U.S. Securities and Exchange Commission (SEC) of trying to "regulate through enforcement" and claimed that it did not provide enough "regulatory clarity" for the cryptocurrency industry. However, SEC Chairman Gensler said: "The lack of compliance in the crypto market is not a lack of regulatory clarity." SEC Enforcement Director Gurbir S. Grewal added that "the rules cannot be ignored because you don't like the current rules or prefer other regulations." Gensler firmly believes that the vast majority of crypto assets, except Bitcoin, are securities, so unregistered exchanges, broker-dealers, and clearing agencies operating in the U.S. crypto industry are illegal.
Now that the SEC has filed a formal lawsuit against Coinbase, many of the arguments they have made over the past few years have been recurring in the media, often with little response.
“1930s Securities Laws Don’t Apply to Cryptocurrencies”
According to Coinbase, it is difficult to determine what jurists were thinking when they drafted specific laws, but it is reasonable to assume that the authors of these securities regulations since the 1930s, or the subsequent Supreme Court when interpreting these regulations, did not consider the future decentralized, crypto-based, automated financial instruments will be adopted by millions of people in the United States and around the world. In short, when the lawmakers at the time wrote the rules to apply to square pegs, they did not consider how these rules would affect the unpredictable round holes in the future.
And according to Gensler, there is nothing about the crypto-securities market that suggests investors and issuers should not be protected by our securities laws. Congress could have provided in 1933 or 1934 that the securities laws applied only to stocks and bonds, but in reality, “Congress enacted the securities laws to regulate investments, in whatever form and by whatever name.” As Justice Thurgood Marshall wrote in the Supreme Court’s famous Reves decision, it is the law of the land.
Securities laws were not written for specific types of assets or technologies but to regulate the investments involved. They apply to everything from classic stocks to citrus grove offerings (1946), whiskey warehouse receipts (1973), and beaver caretaking contracts (1967), the latter three of which are not mentioned in the text of the law.
“The SEC allowed us to go public”
In response to the recent lawsuit against his company, Coinbase CEO Brian Armstrong tweeted: "Please note that the SEC reviewed our business and allowed us to become a public company in 2021." Chief Legal Officer Paul Grewal also made a similar statement. Their point is that if the SEC believes that they are violating the law in issuing securities, then those securities should not be allowed to be listed. However, as Lionel Laurent pointed out in a recent commentary for Bloomberg, maybe they shouldn't have done that. However, the SEC's declaration of Coinbase's registration statement as "valid" in 2021 has little to do with their recent complaint against the company.
When a company goes public, the SEC’s job is to review its registration statement and ensure that it complies with disclosure requirements. That’s all. In fact, the SEC takes every opportunity to describe their process to emphasize that they “do not evaluate the merits of securities offerings.”
Coinbase confirmed this in bold print on page 4 of its lengthy S-1 filing when it filed to go public:
Neither the SEC nor any other regulatory authority has approved or disapproved of these securities, nor has it evaluated the accuracy or adequacy of this prospectus. Any representation to the contrary would constitute a criminal offense.
That last point might make Armstrong and Grewal nervous, though we’re not sure how often the SEC files complaints about this provision.
This becomes very clear if we think about this for a moment and expand our horizon beyond Coinbase. Take a look at five recent IPOs and their business areas:
Atmus Filtration Technologies: Filtration products for on-road commercial vehicles and off-road agricultural, construction, mining and power generation vehicles and equipment
CaliberCos: Asset Management
Strong Global Entertainment: Cinema Screens and Projection Systems
Acelyrin: Immune disease drug
Kenvue: Consumer health company, maker of brands ranging from Band-Aids to Listerine to Neutrogena
If the SEC were to judge companies on merit before they went public, they would need expertise in everything from industrial filtration to financial management, projection technology, biotechnology, skin care, bandage manufacturing, and medical device manufacturing. This would not only be impractical, but also inappropriate.
In its S-1 filing, Coinbase detailed the risk that the SEC could bring the exact same lawsuit they just faced:
We may be subject to legal or regulatory action if the SEC, foreign regulators, or courts determine that supported crypto assets currently offered, sold, or traded on our platform are “securities” as defined below. Applicable Laws… We may be subject to judicial or administrative sanctions for failing to offer or sell crypto assets in compliance with registration requirements, or for acting as a broker, dealer, or national securities exchange without proper registration.
There is regulatory uncertainty regarding the status of our staking activities under the U.S. federal securities laws.
There are two possible explanations here: either Armstrong and Grewal (the latter an experienced attorney and former magistrate judge) don’t understand the law or are unfamiliar with Coinbase’s SEC filings; or they are deliberately misrepresenting the facts as part of a public relations strategy.
'No path to compliance'
I admit that they are probably right. Coinbase thinks this is a securities law issue, while the SEC thinks this is a Coinbase issue.
Let’s say a company goes to the FDA and says, “Hey, we want to start selling recreational heroin to the public.” If the FDA responds, “No, you can’t do that,” then the company might complain that the FDA doesn’t provide a path to compliance. People might scoff at that.
This company can insist that the FDA is wrong, demand that they and/or Congress write new rules so that this innovative heroin business can grow and promote the prosperity of the US capital markets, and decide to sell heroin anyway. When things don't go well, people may not feel sympathy for them.
Like most crypto platforms, Coinbase has decided to operate a combination of the roles of an exchange, broker-dealer, and clearinghouse. These three functions — bringing together buyers and sellers for securities orders, trading securities on behalf of others, and intermediating trades — typically need to be kept separate because conflicts of interest can arise when one entity controls all of them. Coinbase would need to fundamentally change its business model to separate these functions, but it has so far seemed unwilling to do so. “[Compliance for crypto intermediaries] is more than ‘paying lip service to a desire to comply with applicable laws’ or seeking a series of meetings with the SEC during which you are unwilling to make the changes necessary to comply with the law,” Gensler said in a speech a few days ago.
Even signing up to be a part of these types of businesses requires going through a process of disclosures, inspections, and audits that is more like what one would expect to experience at a proctologist’s office. This is not an easy feat for most honest and upright businesses, let alone crypto companies.
Less than a week after the lawsuit was filed, we know very little about Coinbase’s potential legal strategy. However, based on their past behavior, my guess is that it will include a lot of PR and attention-grabbing tactics involving these very same arguments. From Armstrong’s tweet, I can infer that Coinbase seems to be hoping to rescue itself with congressional intervention:
Brian Armstrong @brian_armstrongRegarding the SEC's complaint against us today, we are proud to have represented the industry in court and finally clarified the rules for crypto. Please remember:
The SEC reviewed our business and allowed us to become a public company in 2021.
We do not list securities. We reject the vast majority of assets we review.
The SEC and CFTC have issued conflicting statements and have not even come to an agreement on what is a security and what is a commodity.
That’s why the U.S. Congress is introducing new legislation to address this, and other countries around the world are taking action to create clear rules to support this technology. Instead of issuing a clear rulebook, the SEC has taken an enforcement approach to regulation that undermines American interests. So if we need to use the courts to get clarity, so be it. By the way, if it wasn’t obvious, the Coinbase lawsuit is very different from the others — the complaint against us is focused entirely on what is or is not a security. We are confident in our facts and the law. We will get the job done. In the meantime, let’s keep moving forward and build an industry together. America will get it right in the end.
Congress has yet to agree on the issue of cryptocurrency, especially after the FTX debacle. And the various draft legislation that has been proposed is largely hopeless by the time it arrives. However, Coinbase has invested a lot of time, energy, and money in lobbying: in 2022, they spent $3.4 million lobbying the crypto industry (combined with Binance’s $1.1 million in lobbying in the U.S., for a total of about $11.9 million in industry lobbying efforts).
The lobbying appears to have had an impact. When the SEC filed suit against Binance and Coinbase, some members of Congress moved quickly, but not to help the agency regulate an industry damaged by a year of crashes and harm to American customers. Today, Reps. Warren Davidson (R-OH) and Tom Emmer (R-MN) introduced the “SEC Stability Act” with one main goal: to fire “tyrannical” SEC Chairman Gary Gensler.
