SEC moves to sue Coinbase over asset listings and staking, company sees ‘retaliation’

By March 22, 2023Bitcoin Business
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Coinbase CEO Brian Armstrong
Brian Armstrong, CEO and cofounder of Coinbase.

Coinbase disclosed on Wednesday that the company has received a Wells Notice from the Securities and Exchange Commission—a document the agency uses to inform firms they are facing imminent legal action.

The company revealed it received the notice in a 8-K filing—a form used by public companies to disclose significant news to shareholders—and in a blog post, titled “We asked the SEC for reasonable crypto rules for Americans. We got legal threats instead.”

In the post, Coinbase said the SEC had issued the Wells Notice over “aspects of the Company’s exchange, our staking service Coinbase Earn, and Coinbase Wallet after a cursory investigation.”

The post added that staff had informed the company of potential securities laws violations but did not provide much specificity. Meanwhile, Coinbase said it does not intend to change how it operates in relation to the notice, while chief legal officer Paul Grewal suggested the company will go to court over the allegations if necessary.

“If needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets. Until then, it’s business as usual,” said Grewal.

Coinbase shares, which had been riding high in recent weeks, fell 8% in after hours trading following news of the Wells Notice.

A person close to Coinbase, speaking on the condition of anonymity due to legal sensitivities, told Fortune the SEC’s decision to issue the Wells Notice was likely tied to its recent declaration that it was exploring expanding off-shore operations in response to U.S. regulatory pressure, and the company sensed the agency had acted “in retaliation.”

The person added that the Wells Notice also alleged Coinbase had listed digital assets that could be viewed as unlicensed securities, but did not specify what those assets might be.

In its blog post, Coinbase appeared to defend the integrity of its listing process, noting that it has a “rigorous asset review process” that rejected more than 90% of assets that apply to be listed on the platform, and that hundreds of assets have been rejected on grounds they may be securities.

The law over when digital assets constitute a security is currently deeply muddied as the SEC has suggested that any other token beside Bitcoin likely falls in that category, while the head of its sister agency, the Commodity and Futures Trading Commission has recently stated many tokens are actually commodities.

The securities issue is currently before a federal court in a closely-watched case involving the SEC suing the crypto firm Ripple over its sale of the XRP token. Both parties have sought a summary judgment in the case, and the New York judge in the case is expected to issue a ruling in the coming months—the judge could rule in favor of either party on the legal issue, or send the case to trial.

While the ruling in the Ripple case is likely to inform any litigation between Coinbase and the SEC, any court fight involving Coinbase is likely to involve a broader range of issues and assets. That includes the issue of whether services that offer staking—a process where crypto owners receive rewards for pledging tokens that help secure a blockchain network—are selling unlicensed investment contracts.

In February, the SEC announced that crypto exchange Kraken had agreed to shutter its staking service and pay a $30 million fine. Coinbase has argued its own staking service is in a different category because it never holds customer assets, but instead simply provides software that lets them participate in staking activities.

Wednesday’s developments mark an escalation in a long-simmering tussle between Coinbase and the agency. CEO Brian Armstrong has long been a vocal critic of the agency over what in the crypto industry view as a failure to provide clear guidance on the rules governing digital assets, and a refusal to deal with crypto firms in good faith. In September of 2021, Armstrong accused the SEC on “some really sketchy behavior” in a lengthy Twitter thread—a comment that coincided with the SEC’s issuance of a previous Wells Notice over a proposed “Earn” product that would have let Coinbase customers earn interest on certain tokens. Coinbase ultimately shelved the product before launching it.

In Wednesday’s blog post, Coinbase’s Grewal also objected to the SEC’s refusal to address proposals the company had submitted for a regulatory framework for digital assets, and hinted at internal divisions at the agency.

“We met with the SEC more than 30 times over nine months, but we were doing all of the talking … In January, the day before our scheduled meeting, the SEC canceled on us and told us they would be shifting back to an enforcement investigation. We now understand that there is disagreement within the Commission itself on how to proceed with a registration path. This was just two months ago,” wrote Grewal.

This story was updated several times with additional details.

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