Brian Armstrong, Co-Founder and CEO of Coinbase Inc. , during the Singapore FinTech Festival, in Singapore, on Friday, November 11. 4, 2022.
Brian Van Der Beek Bloomberg | Getty Images
Cryptocurrency exchange Coinbase delivered a fiery response Thursday to a Wells notice issued by the Securities and Exchange Commission last month, telling the federal regulator that enforcement action against the cryptocurrency exchange would pose a “significant software risk” to the SEC that would otherwise that would “fail on merit”.
Coinbase does not list, screen, or conduct trading in securities Answer He said. The SEC’s analysis of employees to justify an enforcement action “appears to be based on superficial and incorrect analogies of products and services offered by others,” Coinbase wrote in a statement. blog post From Chief Legal Officer Paul Grewal.
Separately, Grewal told CNBC, “At the time we became public, we had detailed discussions with the SEC about aspects of our business that are now — two years later — the subject of Wells’ notice. Nothing has changed.”
The SEC pointed out to Coinbase in a good notice back in March that its spot trading, betting, custody, and institutional trading businesses were in jeopardy. The SEC warning to Coinbase indicated that the regulator would allege that Coinbase was offering and selling unregistered securities, in violation of federal law. The SEC has used unrecorded offering and selling violations to force other cryptocurrency exchanges to shut down services in the United States, including Kraken’s staking as-a-service product.
If the SEC succeeds, it could force Coinbase to shut down those units. To date, the Securities and Exchange Commission (SEC) has never approved a crypto-asset entity as a national stock marketdespite extensive dialogue with Coinbase over the years.
Crypto company executives have been signaling for months that Coinbase is willing to deal with the SEC in an existential case not only for the sake of Coinbase but the future of the US crypto industry in general.
Coinbase noted that the company’s years-long efforts to cooperate with SEC securities officers did not produce any concerns from SEC employees until recently. Coinbase also indicated that the SEC could have denied the company permission to go public in 2021, when it reviewed Coinbase’s S-1 filing.
Perhaps most importantly for the rest of the US cryptocurrency industry, Coinbase also argues that the proposed fees are based on “flawed and untested” theories involving investment contracts, spot markets, and custodial services.
Securities lawyers rely on something known as the Howey test, from a Supreme Court case where the SEC sued the operator of a Florida orange grove for a rent-back and profit-sharing arrangement involving the sale of oranges.
The four elements required to determine whether transactions constitute investment contracts: an investment, in a joint venture, and a reasonable expectation of profit, from the work of others.
Coinbase is a secondary market, which means that investors buy and sell securities they already own rather than buying them directly from the issuer. Nasdaq and the New York Stock Exchange are also secondary markets for US stocks. The courts were already reluctant to extend Howey’s. It amounts to including secondary trading for assets where there is no issuer,” Coinbase’s response noted.
Coinbase has also issued a point-by-point disclaimer of Howey’s applicability to the exchange’s staking service. “Coinbase retail services failed all four axes of the Howey test,” said Coinbase’s response.
Coinbase is represented by Sullivan & Cromwell.
“The SEC generally does not acknowledge the existence or lack of any investigation unless or until charges are filed,” an SEC spokesperson told CNBC.
“Coinbase never wanted to litigate with the commission. Nor should the commission want to litigate either,” Coinbase wrote in its response. “The litigation would put the commission’s own actions on trial,” Coinbase said, “undermining the public trust that has been built up over decades.
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