Following up on its March 22nd Wells Notice, the SEC finally filed its lawsuit against Coinbase this past Tuesday. The release of the 101-page civil complaint, clearly anticipated by a well-prepared Brian Armstrong, CEO and Founder of Coinbase, prompted a high-visibility, financial TV tour where the well spoken pioneer of cryptographic asset exchange, custody, and trading, made a forceful defense of his company’s position regarding the contested issues. Though the lawsuit itself was expected by all, and the basis for the complaint hinges on the well known question of whether the 13 crypto tokens named in the complaint are securities or commodities, there were more than a few, to my mind at least, unexpected arguments/postures presented by the sides that are worth keeping an eye on. This holds true for both the legal and non-legal aspects of the challenge, the latter inclusive of the politics, optics, and practical real-world consequences of what most stakeholders would consider an unfortunately hostile, but welcome, fight to gain clarity on the core security/commodity issue. The entirety of which pathetically finds itself, once again, left to the courts to decide, having to mop-up the mess of another failed responsibility of Congress.
On the legal front? Lean SEC
As already mentioned, the bulk of the government’s (SEC’s) case against Coinbase falls on the ultimate determination by the courts whether the named crypto assets are securities or commodities. If deemed securities, then the SEC’s case is open-and-shut (my opinion), and Coinbase will be found liable for the charges against it for operating an unlawful broker/dealer, securities exchange, and securities clearing and settlement platform. And though this issue has always been the main source of strife between the crypto asset world and government, it was a different allegation put forth by the SEC that I found more perilous to Coinbase’s case. Ironically, for the little amount of real estate it occupied in the complaint summary, I feel it may be the strongest and clearest accusation against Coinbase in the entire filing.
The issue is Coinbase’s Staking Program, operational since 2019. The program, which pools the pledged crypto assets of investors toward validating transactions on various blockchain protocols, under the management of Coinbase and in exchange for rewards (returns), is for all intents and purposes the active marketing of an investment contract, and an investment contract, per even a not-so-generous reading of the Securities Act of 1933, is a security. On this argument alone, and this is a contrarian view I’m sure, I think the SEC is on terra firma. If the Staking Program agreement between Coinbase and its users is in fact deemed an investment contract, this single allegation could scuttle the Coinbase defense. However, unlike the security/commodity question, the broader implications would be limited to Coinbase the company, and not the entire crypto ecosystem.
On the non-legal front, the politics and optics? Lean Coinbase, Armstrong
Coinbase’s fearless CEO seemed to know the lawsuit was coming this week and was well prepared to hit the airwaves with the major financial news networks. I had the good fortune of catching his 12-minute hit on CNBC’s Squawk Box Thursday morning with Andrew Ross Sorchin, Becky Quick, and Joe Kernen. There he gave a full-throated defense of Coinbase’s position regarding the core issue at hand, explaining that he/Coinbase believe the SEC to be incorrect about their determination that the named tokens in the complaint are securities. He believes that all the tokens traded on Coinbase are commodities, and he looks forward to arguing the merits of his position before the courts. He went on to explain that Coinbase’s policies for vetting cryptographic assets, and tokens in particular, are extremely rigorous. This response was expected from Armstrong, though I’m not so sure Coinbase’s attorneys loved the decision for him to go on the media tour.
But it was Armstrong’s disclosure of the history of his dealings with the SEC, which if true, makes the SEC look like it’s been dealing in bad faith with Coinbase for years. To be fair, Armstrong’s belief that the many turns of Coinbase’s S-1 filing, prior to going public in 2021, was somehow a good faith exercise in obtaining the SEC’s ‘approval’ for Coinbase’s business activities, is 100% wrong (the SEC only clears filings). But since Coinbase went public, his assertion that he and Coinbase’s leadership have met with the SEC “over 30 times in the last year” to get feedback, and received “no feedback”, makes the SEC and Chairman Gensler look like legitimate, bad faith actors.
If what Armstrong says is true, the optics are terrible and the SEC looks like a petty, politically driven (seems to have an agenda) agency that refused to participate in a productive capacity to provide answers and clarity to the really big and important questions around crypto. The consequences of which transcend the legality question, and cut straight to the ability to innovate and raise capital for crypto’s underlying blockchain technology, which is indisputably transformational, and will continue to grow in importance as a critical, foundational technology of the future of financial services.
Takeaway
The SEC’s case, prima facie, looks compelling, straight forward, and well argued, and but for the exception of the investment contract question, ought to come down to the fundamental determination of whether or not the named crypto tokens are deemed securities or commodities by the courts. And though the outcome of the legal wrangling cannot be overstated in its import to investors, technologists, and society as a whole, I think the bell having been rung, and the fight begun, despite the animus of both sides, is a welcome development for all of the constituencies who are seeking the exact same thing – CLARITY.
Post-script. Completely unrelated to the lawsuit
Towards the end of Brian Armstrong’s spot on CNBC Thursday morning, Becky Quick asked him a really interesting question, “do you regret going public?” She wanted to know if Coinbase going public and falling under the intense scrutiny of U.S. securities laws was a mistake for a company whose business relied on a new technology and the trading of a new asset class. Armstrong took but a second to respond, and I loved his answer. I loved it as a principal of a broker/dealer, and an entrepreneur. Armstrong said that he/Coinbase wanted to be the first of its kind to go public, even though he knew they would “take a few arrows”, because “that’s what being a leader in the space means.”
Good on him.
