The U.S. Securities and Exchange Commission (SEC) is making a decision “on the fly” about alleged violations of the law, cryptocurrency exchange Coinbase (COIN) announced Thursday.
The San Francisco-based platform responded to the Wells notice by rebutting to the SEC in documents first published on Thursday. You may file a lawsuit against the exchange.
Many of Coinbase’s arguments are based on the idea that exchange-listed cryptocurrencies are not securities. This is in contrast to SEC Chairman Gary Gensler’s assertion. Securities under federal law. Other allegations outlined in the document state that Coinbase’s own products do not meet the standards for securities law violations, even though certain digital assets listed on exchanges are securities.
The SEC warned last month that Coinbase could be sued when it files a notice. The SEC alleges that Coinbase’s staking service, Prime and Wallet products, and its general listing process may all violate federal securities laws.
In a video shared Thursday, Gensler reiterated his view that cryptocurrency intermediaries should be registered as regulated in the United States. It’s not a lack of regulatory clarity,” he said.
“An investment contract exists when money is invested in a common enterprise with a reasonable expectation of profits to be obtained from the efforts of others. Any exchange must comply with securities laws and be registered with the Securities and Exchange Commission,” he said. “Instead, many crypto platforms are just pretending that these investment contracts they offer resemble goldfish,” he says, using an analogy about pets.
In a response filed with regulators on April 19, Coinbase said it “repeatedly” answered SEC staff questions about how it determined whether listed assets were securities. The exchange also refuted the SEC’s allegations that it simultaneously operates a domestic stock exchange, brokerage firm and clearing house.
“The threat of imminent lawsuits appears intended to pressure Coinbase to accept claims that the Commission simply does not have the power to order. agree that virtually all digital assets listed in the (ii) review the entire business model to register as an NSE; [national securities exchange] This may require Coinbase to abandon its entire customer-facing business and overhaul its public company governance structure to comply with NSE and clearing house centralized voting rights management restrictions.” The exchange insisted. “None of these objectives are supported by law or within the commission’s mandate.”
As part of its response, Coinbase created a video with CEO Brian Armstrong and General Counsel Paul Grewal discussing the history of the exchange.
Grewal told CoinDesk that he met with SEC representatives after exchange representatives submitted their responses. SEC enforcement actions require a majority of five commissioners to vote in favor. The advantage of Wells’ answer is that these commissioners get both the executive’s argument and the company’s answer in deciding how to vote.
“Our sense is that they remain unconvinced at the staff level,” he said. “To be clear, we are fully prepared for litigation and have been for some time. We should not be under the illusion that we hold hope that they will change their minds.”
Coinbase already owns both a broker-dealer and an alternative trading system (ATS), but operating them requires approval from the SEC and the Financial Industry Regulatory Authority (FINRA), the company said. It also said it has 45 remittance licenses, a New York bit license, and a designated contract market.
Exchanges are also asking the SEC many questions, including asset listing processes, wallet products, and staking services. The SEC is now arguing that all three of these products may violate securities laws, the exchange said.
“An eight-page chronology of some of Coinbase’s four-year engagements with the Commission is attached as Appendix A. It includes dozens of instances where Coinbase has asked the Commission for clarification as to whether such registration would be required, including with respect to companies and, if so, their dormant broker-dealers and ATSs. How to do it,” Filing said.
According to the filing, Coinbase provided information in response to SEC staff questions about all three of these types of products, but “the staff did not raise any concerns during the meeting” regarding the products.
The exchange also claimed it had not received “fair notice” from regulators about the enforcement action, reiterating in the document that “one media statement by members of the committee is not policy guidance.”
“We have seen the SEC change its position on what assets qualify as securities. Even after becoming chairman, he said he believed the registration framework was not in place and was willing to work with Congress.
Coinbase’s filing argued that it could provide further rulemaking to clarify how the SEC views digital assets as securities.
“If the Commission wishes to consider how issuer disclosure, brokerage, custody, clearing, and related issues operate in the digital asset securities market, Coinbase will be able to discuss these issues and I am always keen to do so,” Filing said. “These issues need not and should not be brought up in court.”
