Coinbase was issued a Wells notice from the U.S. Securities and Exchange Commission on Wednesday, and executives from the company took to Twitter Spaces to discuss the decision and what Coinbase’s next steps will be to make legal frameworks for the crypto world.
“Regulators should come up with the rules, tell everybody the rules and we follow them,” CEO Brian Armstrong said during the conversation. “The current laws are not clear and we would like to get more clarity.”
Per a Coinbase SEC filing, the government agency’s staff has “advised the Company that it made a ‘preliminary determination’ to recommend that the SEC file an enforcement action against the Company alleging violations of the federal securities law.”
“I think it is easy to look at the situation right now and conclude that the SEC is trying to change the game,” Paul Grewal, chief legal officer of Coinbase, said during the Twitter chat. “What’s actually happening is the SEC is trying to cancel the game after it’s been played. And so we think it’s very important to keep a focus on what this means [longer term for Coinbase and the industry].”
In the filing on Wednesday, SEC language appeared to indicate that staking through a third-party service can run afoul of securities law.
But existing securities laws that were established roughly 90 years ago simply do not work for less intermediated digital assets that are utilizing innovative blockchain technology, said Sheila Warren, CEO of the Crypto Council for Innovation. “There are no current frameworks in the U.S., therefore, it is not possible for crypto companies to operate in the U.S. in a way that prevents them from facing regulatory repercussions,” she added.
In 2021, the SEC allowed Coinbase to go public; through that process, the company provided extensive information to the SEC about its business, Warren said. In the company’s S-1 filing, there were 57 mentions of staking, she added. “Why did the SEC fail to raise any concerns at that time?”
The Coinbase Wells notice, and the company’s comments immediately following, indicate that ensuing events could lead to more regulatory clarity on when staking becomes an activity that falls under regular securities law and when it is allowed without additional legal oversight.
“Over the next 90 days, we’ll see bills introduced, hearings held and potentially actual movement on pieces of legislation,” Grewal said. “But there’s a cloud over all of that. And that’s this enforcement action, which is really unfortunate in terms of providing the clarity we need at this critical time.”
In general, Coinbase has tried to take a compliance-first approach and make a bridge between fiat and crypto, Armstrong said, adding that while the exchange has worked with a number of regulators, the SEC has been a pain point where they have “struggled” to have meaningful conversations.
“After we asked the SEC to tell us what particular tokens give them concern or why staking products might in fact fall in their jurisdictions despite our arguments and contrary, we’ve simply been told nothing,” Grewal said. “It’s been a frustrating process.”
An offshoring of crypto companies and market share alike could come “at a great cost to American consumers and investors, as well as our national and economic security,” Warren said. “Other jurisdictions are establishing regulatory clarity for digital assets as they seek to take the lead in both innovation and finance — spaces in which the United States has historically dominated.”
If the crypto industry doesn’t get clear rules of the road, expertise will move offshore, Warren said. The U.S. market has already seen that play out in the semiconductor industry, she added. “After letting it move offshore, it is now a big national security challenge and the White House is releasing factsheets about bringing semiconductors back to the U.S.”
In fact, companies are already moving out of the U.S., said Kavita Gupta, founder and general partner of Delta Blockchain Fund.
“We already have started seeing this in the past couple of months, especially with the way the SEC couldn’t handle FTX, a company which supposedly was working with them,” she told TechCrunch+. “With most of the crypto-friendly banks disappearing in the U.S. like Signature, SVB, etc, this trend continues.”
Going forward, clearer regulatory frameworks need to be created for digital assets in the U.S. Failure to do so could result in America’s competitive edge and innovation to fall behind, both Warren and Coinbase execs hinted.
The “only silver lining” from the SEC’s Wells notice is that there is a transparent and open dialogue now in the court between the agency and Coinbase, Gupta said. As of now, the U.S. and the SEC have been working in a very gray area and have not provided a clear and complete legal structure on how crypto products should comply with their rules, she added. “People are ready to pay taxes and ready to work with the government if there is a structured, clear regulatory framework, which we have not seen in space.”
While the Wells notice was issued and the company has publicly responded, it will be interesting to see how it pans out in court and its impact on the U.S. crypto market.
“Crypto is a global movement, I want there to be a more fair and free and global financial system,” Armstrong said. “I think crypto is the best tool to do that, but the U.S. is a major economy and we can’t let the U.S. fall behind.”