Coinbase, the second-largest crypto exchange globally, is pushing for regulatory clarity in the crypto ecosystem, even as it’s fighting some legal battles of its own.
The SEC sued Coinbase for securities laws violations on Tuesday, just one day after the SEC sued Binance, the world’s largest crypto exchange.
In April, the SEC issued a Wells notice to Coinbase, in a “preliminary determination” to recommend that the agency file an enforcement action against the company for alleged “violations of the federal securities law.”
Leading the charge is Coinbase’s chief legal officer Paul Grewal, who himself was busy this week testifying before Congress.
The SEC listed 13 cryptocurrencies as securities in Coinbase’s suit, but the agency noted it was “not limited to” those. Even with the case up in the air, the exchange has “no plans to delist any of these assets,” Grewal said.
Separately, on Tuesday, the U.S. Court of Appeals for the Third Circuit gave the SEC a deadline to respond to Coinbase to clarify its stance on a rule-making petition that Coinbase asked for in July 2022.
TechCrunch+ sat down with Grewal to learn more about the company’s operations going forward, how it plans to deal with the legal process, its level of confidence amid the crackdown, and plans for best and worst case scenarios.
(Editor’s note: This interview has been edited for length and clarity.)
How long will the legal process potentially take with the SEC, and how far is Coinbase willing to go?
The legal process is important to understand because there’s actually several legal processes happening at once. Focusing on the SEC case against Coinbase, that’s really only going to be up to the court, which will preside over this case.
It’s unfortunately the reality that in many cases, courts take many months or even years to resolve the dispute between the parties. But I’m hopeful and confident we’re going to get to a resolution here sooner rather than later. Only because we believe the issues here are actually fairly straightforward relative to some of the other cases that were brought by the SEC in recent months and years.
There’s a separate case, though, that’s going on that I think is equally important to pay attention to, which is a case that Coinbase brought against the SEC asking the Third Circuit Court of Appeals to order the SEC to answer our petition for rule-making that we filed last July. And in that case, just [Tuesday], hours after the SEC filed its suit, the Third Circuit on its own issued an order to the SEC to explain whether it had in fact reached a decision on rules for crypto and if not when a decision would be coming.
Perhaps most importantly, it noted that the SEC’s decision to sue Coinbase and the chair of the SEC’s statements suggested that a decision had already been made and simply not yet communicated. So that’s the case that we think will move forward on a much more accelerated crack. But to answer your second question, however long it takes, Coinbase is committed to vindicating not just its rights, but the rights of the crypto community as a whole because we feel these issues are fundamental.
What are the chances Congress moves soon enough to create crypto regulation to avoid litigation? Is that even possible?
Well, in between the two lawsuits that I mentioned, [Tuesday] I had the pleasure of talking to Congress. I testified before the House Agriculture Committee on a draft piece of legislation that would create a nearly comprehensive framework for crypto for the very first time here in the United States. I was very encouraged by the seriousness of the questions from the congressmen and congresswoman. They were engaged. They were thoughtful. And they were bipartisan in making clear that that committee, at least, sees a real need for sensible standards and that the time to act is now.
We think the odds are higher than they might have otherwise been that a new law could come into effect.
Regardless, we’re going to pursue these different avenues for clarity and certainty for crypto independently. We will defend ourselves in court and will continue to advocate for sensible legislation that finally will end this kind of crazy system we have for ourselves here in the United States.
I saw the video clip Coinbase put out after the SEC lawsuit was filed on Tuesday, and it mentioned that Coinbase has met with the agency 30 times in 2022 asking for guidance. What were previous conversations with the SEC like?
This is a lawsuit that we’ve been preparing for for a while because of course the SEC told us back in March they intended to pursue litigation. Even well before March, it became abundantly clear to us that the SEC had no serious interest in dialogue or conversation around what sensible regulation might look like.
The reason I say that is that even as we were publicly advocating for rules through our petition that we had filed, we met privately with the SEC. In fact, we had 30 separate engagements with the SEC going back to last fall, in which we came forward with our own ideas for what legislation could look like, how a broker dealer and alternative trading system might work for crypto or even a national securities exchange, which is a very traditional and onerous model, but one that we thought could ultimately work if there were some reasonable accommodations for some of the features of this technology and of this market.
Unfortunately, despite coming forward with multiple ideas on how this might actually work, and different ways that we could get to exchanges like Coinbase registering with the SEC in a manner that they say they want. When it came time to get a response from the SEC, or to hear their ideas for how this might work, we received nothing. We were simply thanked for our time and invited to leave.
With everything going on, can Coinbase continue to operate without interruption? What will be the future situation for the crypto assets on your platform that are listed in the suit as “securities,” by the SEC’s definition?
It’s business as usual here at Coinbase. We’re going to defend ourselves in court, but in the meantime, the business continues and we’re gonna continue to ship great products and services for our customers.
As for … handful of assets that were accused in the case, we always consider new information when it comes to listing our assets, and so we will obviously do that here. But at least as things currently stand, we have no plans to delist any of these assets and we want to continue to offer what we think are important products and services to our customers in ways that they’ve come to expect and deserve.
What is Coinbase’s level of confidence right now regarding the situation with crypto assets? What is the stance on what is versus what is not a security?
We’re very confident that the status of crypto will remain strong and that once a court presided over by a federal judge with education and training with these issues, the courts are going to see that the SEC has simply misread the law here.
So we’re very confident of that position and at the same time, as I said, we are confident that crypto is here to stay. And the reason we’re confident is even in this relatively early phase of the technology’s life, 20% of Americans have bought or sold or otherwise traded crypto. That’s a remarkable statistic. And so Americans are saying they want crypto, they want access to safe regulated products here in the United States.
And the only challenge now is for safe regulations to be adopted that meet that expectation and allow this industry to continue to grow. So we are very confident.
There’s no question crypto is going to continue to thrive outside the United States and that’s one of the reasons why we find it so striking that even as other countries like the U.K. and Singapore and Australia and European Union — they’re all adopting strict, firm but sensible rules for crypto. We have this one part of our federal government that seems to be insisting on a very different approach.
To go back, we talked about SEC and Congress and their sentiments. What regulatory agencies are most receptive to adopting this sector based on conversations you’ve had?
Every regulatory agency we interact with is focused on keeping American consumers and investors safe. That’s true at the Department of Treasury, where we are supervised and licensed as a money services business, that’s true at the Commodity Futures Trading Commission, where we have licensed entities, and that’s true at the state level.
Coinbase was the very first company to receive a Bitlicense in New York state, and 44 other states have issued Coinbase money transmission licenses. All of these other agencies are just as committed as the SEC to protecting Americans. But they’re also committed to developing sensible and flexible standards that accommodate this new technology in ways that allow this connected technology to continue to grow. I think the traditional financial system leaves much to be desired. In fact, you know, 80% of Americans feel the traditional financial system is stacked in favor of incumbents and against the public.
So I think state regulators and other federal regulators understand that we need diversity of participants in the financial system in order to offer more Americans access to basic financial products and services. The only question is how to do that in a safe and compliant way.
What do you think of the Binance SEC lawsuit?
I haven’t studied it very carefully. It’s only been available to the public for a couple of days. And I’ve had a few other things to do between now and then to be fair.
But I think there are some very important differences between the case that was brought against Binance and the case that was filed against Coinbase. For example, in the Binance case, you have not only allegations of certain tokens that were listed, or securities and other products offered were securities, but you have very serious charges. And these are only charges at this point, but they’re certainly allegations in the complaint regarding wash trading, proprietary trading without disclosures, abuse of customer funds and a disregard for segregated accounts, and so on and so forth.
You have the CEO charged in the case, personally, and you have an SEC that is seeking an immediate seizure of assets in the form of a temporary restraining order. And so, you know what, we’ll see how things play out for both companies. I can speak for only this company and say that we study the allegations. We were confident in our legal position, and it’s unfortunate we have to go to court, but if that’s where we have to finally achieve clarity for the industry, that’s where we’ll go.
What is the ideal outcome from the SEC case and how is Coinbase planning for a worst-case scenario?
Ideally, what you would have is a dialogue and a public and transparent process that ultimately resulted in serious standards that will keep American consumers investors safe but that recognize that blockchains operate differently; that settlement and clearing work is fundamentally different when you’re talking about digital assets as compared to more traditional assets; that important limitations can be put into place to address legitimate concerns about conflicts of interest and commingling of customer funds.
We can do this. We’ve sent people to the moon, we develop vaccines in this country. We can certainly grasp basic rules that will allow investors to be protected on the one hand while promoting innovation on the other. But I’m not sure that we have a willing dance partner in one part of the federal government and that’s part of the problem.
As for what this means for Coinbase and our business. As I said, we’re gonna continue operating business as usual. We do have a significant business outside the United States. Approximately 20% of our top-line revenue now comes from markets other than the U.S. So we’re excited about what’s happening in London and Sydney and in other parts of the world all over. It’s just unfortunately, we have to deal with this issue at the same time as we pursue those opportunities. And so that’s what we’re going to do.