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


A few days ago, Coinbase Global Inc.’s top lawyer unequivocally rejected allegations by the United States Securities and Exchange Commission 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 the story.”

The end? Given that the SEC has opened an investigation into Coinbase’s activities, according to Bloomberg News, this now only looks like the start of tough questions about the crypto platforms’ business models and their prospects for future earnings amid a sudden market crash. Utopian Crypto chatter is about to be scrutinized in a way that will fundamentally alter the digital currency market.

As consumers suffer losses and politicians fear a backlash, regulators are under increasing pressure to ensure – however belatedly – ​​that market rules are followed. Watchdogs such as SEC boss Gary Gensler have plenty of feathered and quackery targets, but pretend they’re not ducks: bank-like lending products that aren’t subject to scrutiny. banking, digital dollar substitutes that are not backed by dollars, trading platforms that are not registered exchanges, and investment tokens that say they are not securities.

Coinbase may struggle to escape more scrutiny as a result. Even without prejudging the outcome of this specific case, Coinbase’s IPO filing already makes clear that the potential for classification of crypto assets as securities carries a “high degree of uncertainty” and that its own efforts to assess the risk of an individual the fact that the token is considered a security does not mean that regulators will agree. When the SEC filed a lawsuit alleging Ripple was a security in 2020, Coinbase appeared to get ahead of the issue by suspending the token from its platform.

We know the SEC’s view on a handful of other tokens it believes meet the definition of a security — including XYO, Power Ledger, and Flexa’s AMP — because the watchdog aired after a former Coinbase employee was arrested for allegedly trading them using insider information. Embarrassingly, the unusual trades were first spotted and made public by a Twitter user. What Coinbase champions as a “rigorous due diligence process” that protects consumers and securities off the platform is described by the SEC as doing neither.

This is generally not existential or fatal for crypto platforms. When the SEC sued rival Poloniex last year for operating an unregistered exchange, the settlement was just $10.4 million; Coinbase, with revenue of $7.4 billion in 2021, could pay that kind of fine in no time.

But if the review leads to Coinbase being more humiliated or regulated – the fact that it is not a registered exchange or broker has publicly angered Gensler – it will threaten its business model of extracting big profits. of millions of punters looking to get rich in crypto. Transaction fees starting at 0.5% and a relative lack of red tape helped Coinbase rank at a frothy $87 billion valuation last year, based on profit hopes rather than mere talk. utopian of an “Internet of value”. Its growth promises involved listing more tokens, hiring more people, and rolling out new products. These are all under threat – so much so that funds controlled by techno-optimist Cathie Wood just dumped Coinbase stocks for the first time this year.

Coinbase would obviously prefer to have a different kind of discussion – one where it somehow partners with regulators to approve new rules, rather than struggling to prove it is following existing executive orders. A July 21 memo from its top lobbyist, Faryar Shirzad, for example, offered a plan to overhaul century-old laws that wouldn’t fit into today’s “decentralized, automated and crypto-based” marketplace.

But that seems out of touch with the reality of today’s crypto market scars. 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, crypto has grown big enough and big enough to face its first regulatory big picture.

More from Bloomberg 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 harsh: 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 Bloomberg Opinion columnist covering digital currencies, the European Union and France. Previously, he was a reporter for Reuters and Forbes.

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