SEC’s Coinbase investigations a sign of more fights to come – Protocol

Coinbase gears up for battle

In charging a former Coinbase employee with insider trading on July 21, the SEC fired what appeared to be the opening salvo in a bigger legal brawl with the crypto powerhouse over a crucial question: Are crypto tokens securities?

In fact, the fight was already brewing. Before the insider case arose, the SEC was reportedly probing Coinbase itself for alleged securities laws violations, setting the stage for a confrontation that could define not just the company’s future but that of the entire crypto industry.

Coinbase quickly signaled plans to fight back. Chief legal officer Paul Grewal flatly declared that “Coinbase does not list securities. End of story.”

• Grewal and chief policy officer Faryar Shirzad, Coinbase’s generals in the battle with the SEC, also highlighted key arguments for the company’s legal counteroffensive.
• Of the nine digital assets the SEC insider trading complaint said were securities, seven are traded on Coinbase. Grewal said the company has “a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed.”

Coinbase may have overreached in suggesting it had the SEC’s approval. Grewal was making a reference to the SEC review of Coinbase’s IPO filing last year, according to a company representative. The SEC declined to comment.

• It’s far from clear that the issues the SEC would consider in vetting a company’s financial reporting ahead of an initial public offering have much to do with the question of whether digital assets are securities, even if the same agency happens to have oversight in both cases.
• John Reed Stark, former chief of the SEC’s Office of Internet Enforcement, said Grewal’s statement was misleading. “What they’re saying implies some sort of approval,” he told Protocol.

The real question remains, are cryptocurrencies securities? As SEC chair, Gary Gensler has made his view clear: In most cases, yes, they are.

• That stance predates his arrival — under Jay Clayton, the agency sued Ripple on the premise that XRP was an unregistered security.
• The long-standing judicial standard used by the agency, which it’s now applying to crypto, is called the Howey test, which looks at whether people are investing money in something with an expectation of profits from others’ efforts.
• Coinbase has argued that current rules are outdated and don’t make sense. “Securities law is … not well-suited to govern digital assets,” wrote Shirzad in a proposal for a separate federal regulator in charge of crypto.
• The day the SEC announced the insider trading complaint, Coinbase filed a petition asking the SEC to start making rules for digital asset securities. It’s unusual for a company to make such a petition — usually trade associations or Congress itself does that.

Grewal said the company “cooperated” with the SEC’s investigation of the former Coinbase employee. But he complained that “instead of having a dialogue with us, the SEC jumped directly to litigation.” Omid Malekan, who teaches blockchain and cryptocurrencies at Columbia Business School, said there’s been a debate in crypto on “whether Coinbase’s mistake was trying to play with the rules” with an agency already seemingly set against them. If there’s anything to take away from Coinbase’s freshly combative stance, it’s that the company may think it has little to lose from confrontation.

— Benjamin Pimentel (email | twitter)

A version of this story first appeared on Protocol.com. Read it here.

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On the money

On Protocol: After admonishing crypto lender Voyager Digital for “false and misleading” statements on the subject, the FDIC said banks need to stop their crypto partners from wrongly implying their assets are insured.

Binance and FTX are taking a bigger slice of the crypto trading pie. Binance’s spot-trading market share rose to 49.7% in June from 45% in January, while FTX boosted its market share to 8.95% in June from 6% in January.

Charles Schwab is launching its first crypto ETF. The Schwab Crypto Thematic ETF will offer “exposure to companies that may benefit from the development or utilization of cryptocurrencies,” distinct from the spot bitcoin ETFs that the Securities and Exchange Commission has roundly rejected.

Uber is planning a Pro version of its driver debit card. CEO Dara Khosrowshahi said the company is working with Mastercard, Branch and Marqeta on a new Uber Pro debit card and checking account that will offer drivers up to 7% cash back on gas (for those with Diamond status). Uber launched a debit account with GoBank in 2016.

CoinFlex is latest crypto company to conduct layoffs. The exchange said it let go a “significant” portion of its team in an attempt to cut operating costs after it halted withdrawals in June.

Apple is seeking Web3-savvy marketers. Job listings showed Apple looking for an associate creative director candidate with “demonstrated interest in interactive platforms and Web 3.0” and an art director with a “demonstrated interest in Web 3.0,” though Apple removed the second ad.

Overheard

“Am I misremembering?” That’s a testier moment from Judge Sarah Netburn, who’s overseeing the SEC v. Ripple case, as she quizzed government lawyers on a seeming “hypocrisy” in their arguments. Attorney Jeremy Hogan has a good rundown of Netburn’s courtroom lecture.

Robinhood’s all about getting people excited about stocks, but CEO Vlad Tenev counsels Zen, at least when it comes to his own company’s shares. “You can’t run a business, or really live your life, with your emotions being driven by how the stock market is doing,” he told Bloomberg.

Sens. Dick Durbin, Elizabeth Warren and Tina Smith don’t see bitcoin as something to retire on. In a recent letter to Fidelity CEO Abigail Johnson, the senators asked why the firm was allowing “such a volatile, illiquid, and speculative asset in 401(k) plans.”

Coming up

The Senate Committee on Banking, Housing, and Urban Affairs will hold a hearing Tuesday on the housing market. The hearing, titled “The Rent Eats First,” will include comment from academic researchers, small- and large-scale rental property owners and the presidents of the Port of Greater Cincinnati Development Authority and the National Low Income Housing Coalition.

Also on Tuesday, PayPal reports earnings. The consensus EPS forecast for the company this quarter is $0.54, compared to a reported EPS of $0.88 for the same quarter last year.

On Wednesday, Robinhood and eBay are set to report their earnings. Robinhood’s EPS forecast is $-0.31, versus $0.11 for the same quarter last year. The consensus EPS forecast for eBay is $0.70 against a reported EPS of $0.82 this quarter last year.

Block will report earnings Thursday. The EPS forecast for SQ this quarter is -$0.21, where it was $0.38 for the same quarter last year.

Also on Thursday, the Senate Committee on Banking, Housing, and Urban Affairs will host a hearing on the “Economic Costs of Climate Change.” Just one week after Sens. Joe Manchin and Chuck Schumer reached an agreement on some climate provisions for the Inflation Reduction Act, the Senate committee will examine other financial impacts of climate policy.

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