Crypto exchange company Coinbase has repeatedly asked the U.S. Securities and Exchange Commission (SEC) for regulatory clarity, but the requests have gone unanswered, and the SEC has now sent the company a "Wells notice" warning of possible enforcement action, said Paul Grewal, Coinbase chief legal counsel.
"After years of asking for reasonable crypto rules, we're disappointed that the SEC is considering courts over constructive dialogue," Grewal said. "But if courts are required, so be it. We'll defend the rule of law."
Grewal explained in a blog post on the Coinbase website that the Wells notice was vague in its description of exactly which of its services warrant the enforcement action.
"The SEC staff told us they have identified potential violations of securities law, but little more," Grewal said. "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so."
Grewal explained in the post that Coinbase has been open and communicative with the SEC over the last several years, but has received very little communication in response. Last summer, the SEC asked Coinbase if it would be interesting in registering with the SEC and laying out what a potential path for registration would look like, given that a path for crypto exchanges to register does not currently exist. Coinbase said it was absolutely interested in registering with the SEC and developed and proposed two different models for registration.
"We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback," Grewal said. "We got none."
He said the SEC also declined multiple invitations to provide feedback or raise questions about Coinbase's listing process.
"We met with the SEC more than 30 times over nine months, but we were doing all of the talking," Grewal said.
In December, the SEC agreed to provide feedback on Coinbase's proposals by this January. However, the day before the meeting, the SEC canceled the meeting and said it would move forward with an enforcement investigation instead. Grewal said the SEC is still refusing to be forthcoming about what aspects of Coinbase are raising their concerns.
"At no point in this investigation has the SEC told us a single specific concern about a single asset on our platform," Grewal said.
Grewal highlighted the fact that the SEC and Commodities Futures Trading Commission (CFTC) have issued conflicting information about crypto regulation and pointed to a federal bankruptcy judge who recently called out the same issue.
Judge Michael Wiles wrote in a recent ruling against the SEC, "Regulators themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities […] subject to securities laws, or neither, or even on what criteria should be applied in making the decision. This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years."
If regulators can't agree on who regulates which aspects of crypto, "the industry has no fair notice on how to proceed," Grewal said. "Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase, who are committed to playing by the rules. It makes even less sense to threaten enforcement actions unless an industry participant concedes that non-securities can be regulated by the SEC. That is for Congress to decide."
Grewal noted in a Twitter thread that the SEC approved Coinbase's application to go public in 2021.
"Now they have changed their mind on what is allowed," he said.
He also said that Coinbase's challenge in becoming registered is unique to the SEC, and Coinbase has not had the same problem with other regulatory agencies or in other countries.
"In 2018, we acquired two broker dealer licenses in an effort to become regulated by the SEC," he said. "These licenses are currently dormant, and we have been unable to activate them with the SEC for digital asset securities...For comparison, over many years we have been able to successfully become a licensed and regulated crypto business in a number of other jurisdictions around the world, including Singapore, Ireland, Australia and Germany...We've also been able to successfully become regulated by another U.S. federal regulator, obtaining our DCM and DCO license from the CFTC. And by many U.S. state regulators. The SEC remains a sole outlier here."
Grewal called for clear regulatory guidelines and said that if the SEC fails to implement them, it will drive business and innovation out of the country.
"Tell us the rules and we will follow them," he said. "Give us an actual path to register, and we will register the parts of our business that need registering. In the meantime, the U.S. cannot afford for regulators to continue to threaten the good actors in the crypto industry for doing the same legal and compliant things they’ve always done. This unfair approach will only drive innovation, jobs and the entire industry overseas."
