Coinbase’s ‘End of Story’ Is Just the Beginning for Crypto Regulation


A few days ago, Coinbase Global Inc.’s top lawyer issued an unequivocal rejection of the US Securities and Exchange Commission’s accusations that the digital tokens it offers to its clients were, in fact, unregistered securities. “Coinbase does not list securities,” wrote Paul Grewal in a blog post. “End of story.”

The end? With the SEC opening an investigation into Coinbase’s activities, according to Bloomberg News, this seems more like the start of tough questions about crypto platforms’ business models and their prospects for future earnings amid a brutal market crash. Crypto’s utopian babble is about to be scrutinized in ways that are likely to fundamentally change the digital currency market.

With consumers suffering losses and politicians fearing a backlash, there is more pressure on regulators to monitor and ensure, however belatedly, that market rules are followed. Watchdogs like SEC chief Gary Gensler have many targets that are feathered and squawking but claim not to be ducks: bank-like loan products that are not subject to bank oversight, digital dollar substitutes that are not backed by dollars, trading venues that are not registered exchanges, and investment tokens that say they are not securities.

Coinbase may find it difficult to escape increased oversight as a consequence. Even without prejudging the outcome of this specific case, Coinbase’s IPO filing already makes it clear that the possibility of crypto assets being classified as securities carries a “high degree of uncertainty” and that its best efforts to assess the risk of a given that the token is considered a security does not mean that regulators agree. When the SEC filed a lawsuit claiming that Ripple was a security in 2020, Coinbase appeared to preempt the issue by suspending the token from its platform.

We know the SEC’s views on a handful of other tokens it considers to fit the definition of a security, including Flexa’s XYO, Power Ledger, and AMP, because the watchdog passed them on following the arrest of a former Coinbase employee who he allegedly traded them using privileged information. information. Embarrassingly, the unusual trades were first discovered and publicized by a Twitter user. What Coinbase defends as a “rigorous due diligence process” that keeps consumers safe and securities off the platform is being presented by the SEC as if it did nothing.

This is usually not existential or fatal for crypto platforms. When the SEC went after rival Poloniex last year for operating an unregistered exchange, the settlement was only $10.4 million; Coinbase, with revenue of $7.4 billion in 2021, could pay that kind of fine without missing a beat.

But if the scrutiny leads to a more humiliated or regulated Coinbase (the fact that it is not a registered exchange or broker-dealer has publicly irked Gensler), that will threaten its business model of extracting big profits from millions of gamblers looking to get rich. with cryptocurrencies. Transaction fees starting at 0.5% and a relative lack of bureaucracy helped Coinbase trade at a frothy $87 billion valuation last year, based on hopes of profit rather than just utopian talk of a “Internet of Value”. His growth promises involved listing more tokens, hiring more people, and launching new products. They are all under threat, so much so that funds controlled by techno-optimist Cathie Wood just dumped Coinbase stock for the first time this year.

Coinbase would obviously prefer to have a different type of discussion, one where it somehow partners with regulators to pass new rules, rather than fight to show that it is following existing edicts. A July 21 memo from its top lobbyist Faryar Shirzad, for example, offered a plan to overhaul centuries-old laws that are allegedly ill-suited to today’s “decentralized, automated, and crypto-based” marketplace.

But this seems disconnected from the reality of the scars of the current crypto market. Former Commodity Futures Trading Commission Chairman Timothy Massad once warned that Coinbase’s IPO could benefit from the “illusion of regulation.” The irony is that the company’s success has made it a lightning rod for the app, as seen last year when Coinbase shelved a lending product after pressure from the SEC. Like Big Tech before it, the crypto has become big and important enough to face its first regulatory shutdown.

More from Bloomberg’s opinion:

• Crypto breaks the rules. That’s the point: Tyler Cowen

• Crypto Bros has a plan to crack elite football: Trung Phan

• This crypto winter will be long, cold and hard: Jared Dillian

This column does not necessarily reflect the opinion of the editorial board or of Bloomberg LP and its owners.

Lionel Laurent is a columnist for Bloomberg Opinion covering digital currencies, the European Union, and France. Previously, he was a reporter for Reuters and Forbes.

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