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United States Technology

Coinbase Offers a Fiery Response To SEC's Threat of Enforcement Action (cnbc.com) 49

Crypto exchange Coinbase offered a fiery response on Thursday to last month's Wells notice from the SEC, telling the federal regulator that an enforcement action against the crypto exchange would pose "major programmatic risks" to the SEC that would "fail on the merits." From a report: "Coinbase does not list, clear, or effect trading in securities," the company's response said. The analysis SEC did staffers to justify an enforcement action "appears to rest on superficial and incorrect analogies to products and services offered by others," Coinbase wrote in a blog post from chief legal officer Paul Grewal. Separately, Grewal told CNBC, "At the time when we went public we had detailed discussions with the SEC about the very aspects of our business that are now -- two years later -- the subject of the Wells notice. Nothing has changed."

The SEC indicated to Coinbase in a March wells notice that its spot trading, staking, custody and institutional trading businesses were at risk. The SEC's warning to Coinbase noted that the regulator would allege Coinbase was offering and selling unregistered securities, in violation of federal law. The SEC has used unregistered offering and sale violations to force other crypto exchanges to close services in the U.S., including the crypto exchange Kraken's staking-as-a-service product.

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Coinbase Offers a Fiery Response To SEC's Threat of Enforcement Action

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  • by Frank Burly ( 4247955 ) on Thursday April 27, 2023 @05:24PM (#63481934)

    Haven't about a thousand new coins been created? Don't some of these coins sold by Coinbase satisfy the Howie test---making them securities?

    It seems crazy to say that nothing has changed in two years in a tech where people regularly claim "we're still early!"

    • Its the same old thing as other new tech companies claiming falsely that they not like the old companies and therefore old rules don't apply to them. Just like everyone knows Uber is a taxi service, it is not "ride share". If you buy and hold with a company in an attempt to increase value, then it's effectively a security exchange. If you buy and hold gold at GoldRUsTraders.com then it's a security, but if you keep it under your mattress then it's not a security. Nothing about being "new" changes the ru

    • by phantomfive ( 622387 ) on Thursday April 27, 2023 @06:47PM (#63482102) Journal
      The Howey test requires four elements:

      1) An investment of money
      2) In a common enterprise
      3) A reasonable expectation of profit
      4) Derived from the efforts of others

      Bitcoin doesn't meet element 3 or 4, so it's not a security. For other created coins, the SEC is basically saying, "prove they aren't securities, we aren't going to do that work for you." The SEC is going with the assumption that Coinbase is trading securities, and making it up to Coinbase to prove they aren't.

      IMO this is a reasonable approach. Coinbase might be able to succeed, but they should be able to demonstrate that they are following proper regulations.
      • by ceoyoyo ( 59147 ) on Thursday April 27, 2023 @07:48PM (#63482172)

        Bitcoin may arguably not meet the criteria, but some of the ancillary businesses Coinbase runs sound very similar to the actual scheme W.J. Howey Co were up to.

        If you go to https://www.coinbase.com/earn [coinbase.com] you're greeted with a page promising

        Earn up to 6.00% APY on your crypto. Put your crypto to work and earn rewards.

        We'll help you put your assets to work in the cryptoeconomy so you can grow your crypto holdings with little effort.

        So if you buy some land (crypto) and lend it to us, we'll grow oranges (lend it out, stake it, etc.) and return the profits.

        • This has gotten beyond my knowledge of legal regulation, but Coinbase claims it's not a problem because they are not issuing those securities, they are merely trading them.
          • lol I hope not (Score:2, Insightful)

            by Anonymous Coward
            If that's what their lawyers are saying they should be fired because that is patently illegal: "Unless a registration statement is in effect as to a security, it shall be unlawful for any person, directly or indirectly— (1) to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to sell such security through the use or medium of any prospectus or otherwise; or (2) to carry or cause to be carried through the mails or in interstate commerce, by a
          • by ceoyoyo ( 59147 )

            I think there's a decent amount of FUD involved. Coinbase says they're trading crypto coins, which may or may not be securities, which is true. But the SEC seems to actually be interested in their ancillary businesses, not the actual coin trading.

            W.J. Howey Co came up with the idea of people buying land in Florida, leasing it to the company, then the company would grow oranges and pay some profits back to the lessors. Leasing land from someone isn't normally a security, so they didn't register their scheme

        • I don't know if you noticed, but your framing and specific example would define Coinbase's activity as trading in commodities futures, not securities. Why does that matter? Well, there's a Commodity Futures Trading Commission that regulates those.
          • by ceoyoyo ( 59147 )

            My specific example is the US Supreme Court case that provided the Howey Test, which is used in the US to define a security.

      • If you're right, then cryptocurrencies are a commodity that would be regulated by the CFTC, right?

        Either way, it seems to me that it would be improper to punish Coinbase for not complying with regulations when it has been unclear which regulations apply and which authority does the regulating. Straighten that out and apply the rules going forward, not retroactively.

        • In that case surely Coinbase needs to accept they are going to need to deal with regulation and provide a clear argument of which one they come under.

          Right now there are too many people in crypto believing they are beyond the cover of regulation.

      • IMO this is a reasonable approach.

        But it's not in the US. It's up to the SEC to prove they committed a violation, not CoinBase to prove they didn't.

        It's a fundamental tenet of all law in the US.

  • by rsilvergun ( 571051 ) on Thursday April 27, 2023 @05:29PM (#63481944)
    they're an unregulated securities exchange that specializes in money laundering and pyramid schemes. They can't survive basic regulation. KYC laws alone would bankrupt them (by chasing away most of their customers). And that's before we talk about Wash Trading (google it, some "coins" have wash trade rates in the 90s and even Bitcoin is mostly wash trades).

    If they can't get the SEC off their backs they'll have to flee to one of the more corrupt nations, where sooner or later their real assets (e.g. USD Cash) will be seized by whichever dictator's in charge at the moment while also being shut out of most of the global banking system.

    I say good riddance. I don't want this stuff integrated into my economy. It's not even decentralized, having centralized around the exchanges, mining pools and "stake" holders. It's a completely failed experiment. And the "too big to fail" banks would love nothing more than to use it to build their own "crypto backed securities" and do another 2008. No thank you.
    • You can open a Coinbase account for free, you will find that you need to do KYC steps.

      • There is zero scrutiny to any Coinbase KYC to open an account and make deposits. Withdrawing cash is a different story. Then they delay, delay and delay some more for some reason.

        Coinbase willfully lists known frauds like Tether and they're about to get crushed.

        • Re: (Score:1, Troll)

          by DrMrLordX ( 559371 )

          We all know USDT is based on shenanigans. What's funny is the Feds have never stopped them.

      • They do just enough kyc to prevent themselves from being defrauded. The kind of kyc I'm talking about here is the kind you use to prevent money laundering. There's a whole another set of rules and procedures for that. And the way that the laws are structured and written if you as a business try to get around them by letting your employees break the law for you as is popular with financial institutions you still get your ass handed to you.
    • As a company that has the criminal element as a significant portion of their user base, this "fiery response" to the SEC seems extremely mild.
      "Do what we want or you'll find yourself swimming with the... kids down at the YMCA... ya, that's the ticket!"

    • Re: (Score:2, Insightful)

      by ttspttsp ( 7600944 )

      I say good riddance. I don't want this stuff integrated into my economy.

      I do. And I'm a US citizen who votes and contributes to campaigns. Are you a US citizen who votes and contributes to campaigns?

    • by gweihir ( 88907 ) on Thursday April 27, 2023 @10:22PM (#63482324)

      That nicely sums it up. Incidentally, crapcoins are pretty much dead in the EU already. If I read the current regulation correctly, all exchange customers will need to be identified on the same level that banks do within 18 months. The only sane thing to do. Large-scale money-laundering only promotes crime (as the ransomware epidemic nicely shows) and serves no good purpose.

  • If there had been government oversight instead of boardroom orgies at FTX, then maybe not so many people wouldn't have lost billions because of Carolines bad investments.
    And in the end the only thing she thought of was ratting our SBF in order to get away with it.

  • by S_Stout ( 2725099 ) on Thursday April 27, 2023 @06:30PM (#63482078)
    I want to see this in court, get it over with
    • This.

      You can posture and make claims all you want, but assuming the SEC has what it needs to prosecute this, start the trial. If they don't, then they should sit down and shut up until they do(which they inevitably will because CoinBase).
  • If this doesn't work out, Coinbase can always join the ranks of aging performers who are tired of touring, legalized gambling, and sports teams from Oakland. I think they'd fit right in. Just carry on business as usual online, but no longer allowed in some states like California in particular.

    Crypto really is just a pure gamble.

    I used to think it might be fun for the Casinos to have an explicit ponzi game that you can join, they could punch it up with fake ads and stuff, promos, free drinks when you buy i

  • by bubblyceiling ( 7940768 ) on Thursday April 27, 2023 @07:32PM (#63482152)
    There fixed the headline for you
  • Looks like they have nothing.

In the long run, every program becomes rococco, and then rubble. -- Alan Perlis

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