The SEC messed up for years but not protecting consumers against fraud. Now they’re trying to prove their reason existence / gov funding.
In one of the (I think MIT lectures 2018) videos, btw? Gensler stated that [probably all crypto except Bitcoin, but including Ether, are moody moody most likely securities].
However, the SEC fails to to provide any guidance and doesn’t have any official position. The reason is that if they make a small mistake or missed sleeping, they might’ve given a free pass.
Edit - MIT open courseware 2018
Coinbase's PR machine wants you to believe they want clarity. Their actual legal documents instead indicate that they're aware that they're probably violating regulations. Take their petition to the SEC for example--it starts by asking not "are cryptocurrencies securities under the Howey test" but "should cryptocurrencies be considered securities". For a document that's supposedly Coinbase's grand we're-going-to-make-the-SEC-clarify-regulation strategy, it's very long on asking for changes to the regulatory regime and very short on asking for clarifications on the application of regulation to cryptocurrencies. Which strongly suggests that they in fact know how the regulations apply to cryptocurrencies, they just don't like it.
It also helps when one of your former execs came from Goldman Sachs, and were backed by VC including YC and the Stanford mafia--Balaji's buy out of 21 and being placed as CTO confirmed all my suspicions I had during thier mining days.
Honestly, and I say this with all the malice in the World if you are reading this, Armstrong: I hope we can finally get rid of you and that cancer that is Coinbase and all the BS it has wrought us once and for all, even if it crashes the market for a while.
The fact that they hold that much BTC is a huge issue, but what is at the core of this is more to do with the real problem with this is centralized systems with directly conflicting ideals to the overall community operates with so much weight in an otherwise decentralized network: they were unfit to be in this ecosystem and they exploited a very clear window with their immense access to resources and VC money and while they made the most of it, it seems the tide has finally turned on them.
I can forgive Mark and MTGOX, that was a case of what happens when gross incompetence and unforeseen immense growth intersect; he paid a price for that, spent time in a Japanese prison and had his entire life ruined in the process.
Brian Armstrong has spent a decade being the bane of the Bitcoin ecosystem and sold scams to unwitting customers with no remorse, sided with the FUDsters during USAF etc... this is the typical corpo with no scruples trying to act innocent when he is finally subjected to the same regulatory body who leave the rest of us in the dark: those who I will remind you he sided with all along because it benefited him.
I honestly wish he gets the Charlie Schrem treatment and gets humbled in the same way.
As recently as 2 months ago Gensler declined to say whether or not Ether is a security in front of congress.
Whether Ether is a security is irrelevant to this case, based on an investigation which pre-dates Gensler’s term at the SEC, which is about whether Coinbase is required to register and operate as a securities exchange on account of having traded e.g. Solana. The entire argument obsessing over his refusing to come to conclusions until facts are established reminds me of creationists picking a tiny, side element of scientists’ arguments and then spending their entire time arguing with themselves over a point with zero germaneness.
False condition. The SEC has made it clear that various crypto, e.g. Solana, are securities. If you want to trade those, you must register. Again, if you just want to cash trade Bitcoin and Ether, the SEC has shown zero inclination of messing with you.
Before that afaik the only cryptocurrency the sec had explicitly said was a security was XRP which coinbase delisted
If you want to know whether something is legal or not, you talk to a lawyer or (less reliably) law enforcement. When Coinbase asked the SEC if it needed to register, without—to my knowledge—exception, it said yes.
[1] https://www.sec.gov/litigation/investreport/34-81207.pdf
"Blockchain isn't the-- we don't have regulation because of blockchain, and we don't necessarily need a new set of regulations." https://youtu.be/l0vD_FBWk0g?t=1976
Discussion about SAFT / utility etc: https://youtu.be/iWpQpPbo7rM?t=994
XRP is a security, but "what I believe.. is just that, it's a believe". https://youtu.be/7EXcHqLg7BI?t=2767
Bitcoin is a commodity https://youtu.be/KHBi3n0hUSU?t=3591
"So we already know in the US and in many other jurisdictions that 3/4 of the market are not ICOs or not what would be called securities, even in the US, Canada, and Taiwan, the three jurisdictions that follow something similar to the Howey Test that we've talked about. 3/4 of the market is non-securities. It's just a commodity, a cash crypto. So you'll hear debates about initial coin offerings. And what's a security? And what's not a security? Relevant-- relevant and important debate, but for 3/4 of the market, it's not particularly relevant as a legal matter, as a regulatory matter. "
Here's one for Paxos.[2] They asked for permission to run a small-scale blockchain-based clearing operation without registered as a clearing house. No more than 7 institutional customers, a limited list of stocks, and a time limit. They got it.
Somehow, Coinbase doesn't seem to be on the list there. It's a public record.
[1] https://www.sec.gov/divisions/marketreg/mr-noaction
[2] https://www.sec.gov/divisions/marketreg/mr-noaction/2020/fin...
This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?"
It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.
QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia
Alesia: All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question.
Alesia: So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders.
Alesia: So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction.
---
The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities.
https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1...
> The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.
It's that they are unregistered as any of those things.
> 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
We have illegal weapons but what is special with us, we won't use them. So it's not illegal.
Coinbase isn't being sued because it's trading Eth. It's being sued because it's trading a lot of things that aren't BTC or Eth.
Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity.
If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...
The SEC doesn't rule on things. They make rules (not laws), but they don't decide those things. That is the domain of the judicial branch - not the SEC.
The SEC can say "I consider X to be a security" but it's the judges that apply those rules and decide if the proper regulations are followed.
You will note that its a judge demanding that the SEC respond to Coinbase (U.S. Court Tells SEC to Respond to Coinbase's Rulemaking Petition Within a Week - https://www.coindesk.com/policy/2023/06/07/us-court-tells-se... ).
The SEC, as part of the legislative branch makes the rules to follow under its creation as part of the Securities and Exchange Act of 1934. It can bring things to be enforced or decided to the judicial branch - it isn't the judge or jury.
It would be improper for the SEC to make claims that haven't been decided by judicial branch. The SEC can say "we consider digital assets that can gain value by actions of others to be securities" but its consider - saying "yes, ETH is a security" is something for a judge to decide, not the SEC. The way that is done is for the SEC to take a company that is trading what it considers to be an unregistered security to retail customers to court.
The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.
They don't need to make "merit-based judgements" to do the same security analysis they'd do after the IPO.
I said the exact opposite of that. Please look at the second sentence again.
I want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more.
Investment banks would love this. It’s pro bono legal advice.
If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
Also there is potential fine revenue.
But for big enough companies, some amount of taxpayer-paid analysis makes sense. It ultimately benefits consumers.
Isn't analyzing the S1 "pro bono legal advice" to begin with?
And they did have legal opinions, just not from the SEC that is still almost entirely refusing to evaluate crypto tokens. Would a no action letter have been feasible?
Probably not, given the integrated broker-exchange-custodian model. But that’s the point. We specifically outlawed that in 1934. Coinbase was counting on rules being changed in the midst of regulatory inertia.
No, it's asking an agency to clarify its own rules.
If I, as a ham radio enthusiast, find an unclear section of the FCC rules I expect to be able to contact someone and ask what the agency's understanding of it is. They wrote it after all.
For example, if they wrote 5-15Mhz, I might wonder if they mean inclusively. Does that cover 15Mhz, or just 14.9999?
I'm not expecting them to preemptively rule on all legal cases which depend on this, just on their interpretation of their own words.
Why? That’s investors’ jobs. Coinbase disclosed the risk that their entire operations may be illegal.
In traditional finance a "securities exchange" is like, the New York Stock Exchange. A big centralized thing of which there are barely a dozen in the whole country and most people would have trouble to name three. There are many stocks that are only registered on one exchange. That wants to be separated from other functions because otherwise it would become an abusive monopoly.
Nobody has anything like a monopoly on trading Bitcoins so that doesn't really apply.
> Coinbase, as with most crypto platforms, has decided it wants to simultaneously operate as an exchange, broker-dealer, and clearing agency. These three functions — bringing together securities orders for buyers and sellers, trading securities on behalf of others, and intermediating trades — are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. Coinbase would need to fundamentally change its business model in order to separate these functions, and thus far seems unwilling to do so.
Coinbase's real complaint is that it wants regulation to change so that Coinbase is in compliance, rather than Coinbase changing so that it is in compliance. The lack of "clarity" isn't that it's unclear whether or not Coinbase is compliant, but that it's unclear how Coinbase can become compliant without changing foundational aspects of how it's structured. To honestly argue why regulation should change, you would need to explain why a currently-noncompliant policy should be compliant. In other words, why does an apparent conflict of interest in "traditional" finance not actually exist for the crypto industry (or at least why we should be okay with it existing).