Coinbase CEO on SEC Lawsuit and Crypto's Regulatory Challenges | WSJ

coinbase CEO Brian Armstrong is in a battle with Regulators the SEC sued his company saying coinbase broke the rules by listing tokens that the regulator alleges are subject to Securities laws he sat down with the journal to discuss the situation this doesn't seem like one where there's a lot of dispute about the facts you're trading cryptocurrencies on coinbase the question really is are you breaking the law and is what you are trading a security so take us through how you think about this case from a legal standpoint we're not disputing facts here or disputing interpretation of the law what's your interpretation of the law well okay so let's let's zoom out for a minute so if we go back to 2021 you know coinbase we wanted to become a public company we described everything about our business the assets that we list on our platform How We Do staking and the SEC at that point allowed us to become a public company and you know fast forward you know a year later we started to hear some conflicting statements from the SEC the cftc generally when we hear updated information from Regulators we go in and we talk to them we say great if the rules have changed how can we adjust and you know an example of that was they said xrp we think might be a security we said okay we want to act in good faith we'll de-list it we don't know if it's a security or not and that court case is still playing out but you know we want to be collaborative and work with regulators and then something shifted about a year ago um a totally different tone started to happen and we kind of got this information from the SEC that well actually we think everything other than Bitcoin is a security and we kind of said to ourselves well that's not our understanding of the law you know how are you coming to this conclusion and we were sort of met with silence right we did a series of meetings with them probably 30 meetings over the last 12 months where they asked us every question Under the Sun we kind of you know told them everything we could about our business but we didn't really get clarity from them about how we could come in and register which assets they had a concern with why there's contradictory statements between them and the cftc we didn't really get any feedback from them and suddenly we got this Wells notice and then the complaint that was filed yesterday so what basically we're in this environment of you know regulation by enforcement I don't feel like there's a clear rule book The only sort of high-level statements they've made is that everything other than Bitcoin is a security which that's just that's just not what it says in the law and by the way that would also kind of mean like the end of the crypto industry in the US if that was actually the you know what happened and so we have to go to court to challenge that we're proud to do it for the industry and for America but this has been something that has been hanging over the industry and coinbase for a while the SEC is far back as the previous administration Jay Clayton had been saying things about hey some of these things are securities that are being traded out there the SEC has written papers about this you and your S1 when you file to go public put down as a risk the SEC may decide that the stuff that we are trading is in fact a security and they're an onerous and difficult registration obligations that we would have to do should the SEC decide this so it doesn't like this sort of came out of nowhere this was something that had been over the industry for a while but you pushed ahead anyway and built a business and grew that business and added more tokens and added more assets tell us why you did that yeah well there are certainly crypto Securities out there in fact um coinbase has reviewed you know well over a thousand different assets ninety percent of them we've rejected right because we thought some of them could be Securities or they had other we had other concerns about them so we've really only listed a very conservative small number of the assets out there and you know so I agree with the statement there's a lot of crypto Securities out there in fact I would like there to be a robust healthy market for people to trade crypto Securities in the US I think this is one one more area where crypto could help update the financial system around Capital formation and we should make it easier for people to raise money for their company or for something they want to build in the world and those should be issued and registered as crypto Securities we filed a petition formally with the SEC to try to get clarity about how that could happen we acquired a broker-deer license which is dormant because we haven't found a way to activate it with the SEC so I would like there to be a robust market for trading crypto Securities um the you know the 10 or less of assets that we've reviewed that we did decide to list we feel that those are crypto Commodities and so so um they don't need to be registered and traded with under an SEC license let's back up a little bit for people who are not so in the Weeds on the all the various minutia here the SEC is alleged basically that you are running a foul the rules in three ways that you're a broker dealer that you are a Clearinghouse and that you were in exchange all three of those things the SEC requires that you register and take a bunch of actions you aren't doing that there's no dispute that you are not any of those things is that right or is the or is there any dispute that you're acting as a broker dealer acting as a Clearinghouse and acting as an exchange uh no I mean well we don't claim to be a broker dealer or um you know we we've acquired a broker to a license that's still dormant because they won't allow us to activate it but for the comma for the assets that we do trade those are Commodities so they don't require those registrations they don't require the registrations but we're not disputing what you do what you do is function as an exchange function as a Clearinghouse and function as a broker the dispute is around whether what you are trading clearing and broking is indeed something that's under the sec's jurisdiction right yeah we're trading on our exchange crypto Commodities today so let's let's let's Zoom way out again for people who might not be deep into the the minutia of this so the question of what is a security you can think about it in a whole bunch of different ways and there's case law on this but like to zoom way out you've got like baseball cards at one end you've got Apple stock on the other end right baseball cards clearly not a security we trade baseball cards they have value but nobody thinks that like uh you know 1987 tops Daryl strawberry is a is a security Apple stock clearly a security big gap between those things Bitcoin looks like it's more over here closer to a baseball card and the SEC is making arguments that a bunch of things that you trade on coinbase are more over here closer to Apple that their company-like things their companies that work on these protocols that issue these coins they issue the coins they to people who expect that they get a profit from those coins how do you think about that distinction right okay so I'll just clarify up front here I'm not a lawyer right so I'm going to do my best to get to touch on this but you have had a lot of time and and have had to do a lot of thinking about this topic sure this is a deeply technical Topic in the law and I'll tell you my interpretation of it in a second but um it's worth noting that you know in the in the United States we have a Securities regulator the SEC we also have a Commodities regulator and so partly this is a major topic of debate in the US is like which one is it you know it's um but in other countries like in in the UK for instance they just have one Financial regulator for both and it's funny they spend like one percent of their time even discussing this issue as some sort of like kind of wonky you know interesting topic but it's it's a massive issue in the US just because we have two separate Federal regulators and there's kind of like a turf or political you know power sort of battle happening which we feel like we're caught in the middle of so anyway with that as a backdrop there is this thing called the Howie test right which which is the definition of a security and it kind of says you know is there an investment of money a in a common Enterprise with an expectation of profit based on the effort of others so it has those kind of four prongs you can spend you know you can twist yourself into knots kind of tying teasing it apart but the important thing to know is that it all in all four of those things have to be true right so you can imagine um there are things that like you mentioned baseball cards there's other things that people invest in even with an expectation of profit like let's say a Picasso painting right that they hope to make money on they hope it will go up in value but that's not a security right because it's not um based on the efforts of others and so there's various ways that you know you could imagine um a crypto asset would not be a security right if it's if it's sufficiently decentralized there's no common Enterprise right if there's some specific utility around it it's not specifically it's not just for the purpose of you know the value of going up right and so what we need in the United States at this point to get regulatory Clarity unblock this issue get rid of the turf war is regulatory Clarity and I think what's going to have to happen now since the cftc and the SEC have not been able to sort of you know figure this out is we're going to have to have Congress step in and draft legislation that will unblock this issue in the United States or we're going to have to have the courts create more case law which is partly what we can do by going to court with the SEC here is it's just helping get case law created I've been really pleasantly surprised to see that there's now draft bills being created in Congress Congress is very very aware this is an issue by the way they're worried that the U.S is going to be left behind because while this kind of back and forth fighting is happening um you know the UK is Singapore Hong Kong like the UAE every Financial Hub in the world is kind of saying hey we want to be the future crypto web3 Hub and we have clear rules you know Europe Europe just passed comprehensive crypto legislation way ahead of the U.S so usually we think of ourselves as kind of innovative leaders around technology in the US we're taking notes now from Europe because we haven't gotten this figured out so let's I want to come to what the rules should be and what you think they should be and how they should be changed down the road in a second but I want to stay for a little bit on what the rules are now which is what we have to deal with it's what the industry has to deal with there are rules now the rules are subject to interpretation obviously that you will you will be it sounds like you will be taking this to court pretty hard and there will be a trial and a discussion and a litigation about what the rules are assume that's where you're going with this so under those rules I'm going to pick out a couple of things that the SEC has said the SEC has said that there are 13 tokens um that are cryptocurrencies crypto assets or whatever you want to call them that you are trading um they say actually at least 13 but they name 13 that they say are securities and they provide some detail for them and in a couple of those cases from reading the sec's complaint it looks a lot like a company selling stocks so they bring up the example of Solana where there is a there was a fundraising they sold these tokens investors bought the tokens they told the investors we're going to use the money that you give us to grow and develop the platform we're going to hire Engineers we're going to build stuff and in return we're going to reduce the supply of tokens so that the tokens that you hold become more valuable that sounds a lot like our company selling stock how is that not in your view right so you're right the SEC complaint um sort of said of the over 200 assets on our platform we have a concern about these 13. so it was a relatively small percentage um but to answer your question directly so again if any of those four prongs of the Howie test are invalidated it may not be a security right and again this is something the courts would have to kind of really dig into but an example uh would be you know in the Solana case right let's say that um if something has sufficiently been decentralized that could be an argument right but there are founders of Solana there's a Solana Labs there's a Solana entity there was a founder of Bitcoin too right um you know maybe we don't know and ethereum right so this is actually an interesting um sort of nuanced Point um some things could be a commodity from day one other types of crypto assets they may start as a security because they're just raising money for a project um that could you know could be something in the future but then as that project launches and it decentralizes and it develops utility it may actually convert to being a commodity at some point right this is actually an important part of the law that's unclear right now and in for instance the draft bill that we saw come out of Congress last week from McHenry and Thompson they start to try to address this issue of how could it how and when would an asset that started as a security become a commodity right so anyway there's a lot of details where in a moment in time you have to look at it it could be different a year later um anyway with every asset we've listed on our platform we did extensive diligence we did a I think it was like a 72-point legal analysis we rejected 90 of the assets every asset we decided to list we've we felt there was a strong argument that it was a commodity and that's what we're going to go to court to win on so you looked at thousands or a thousand tokens you listed 250 ish of them and the SEC has a problem with 13 at least 13 but they highlight 13. so but the issue is you have to bad a thousand right you can't have any Securities you've got to have all 250 that you trade can't be Securities otherwise you're running an unlicensed Securities Exchange and an unlicensed Clearinghouse and an unlicensed broker so it seems like the the odds are kind of not in your favor so that's not really how I think of it remember we've been the goal of our this lawsuit is to get clarity for the industry right and we've actually been formally petitioning the SEC for Clear well the goal the SEC the sec's goal is to stop you from from breaking the law in their view it's not I don't think they think that there's a lack of clarity in the industry I think they think that you're breaking the law well that may be what they say but you know I can assure you there's a huge lack of clarity I mean every startup in the crypto space is spending huge amounts of money on on legal you know lawyers who basically tell them I don't know there's no case law we can't really give you a clear answer right and and the SEC has really failed to kind of publish a clear set of guidance you know you saw you may have seen in front of Congress you know Patrick McHenry asked the chair just a very simple question on one asset you know is ethereum is ethereum a security or commodity and over and over again he refused to answer I mean so even on some of the biggest assets they can't just give you a clear answer but yeah going back to the prior point I I was going to make so you know our goal with this court case is to begin to get clarity for the industry not just for us but for the whole industry for honestly for for America so that it doesn't fall behind in this in this area um and so if we get any kind of clarity from the court regardless of the outcome honestly I think it would be a step in the right direction but I we feel strongly all the ones that we listed there since we took a pretty conservative approach they are they are Commodities now in the process of of assessing which should be which assets should be listed that was something that your company spent a bunch of time on you participated in some of these discussions to describe the the process how does that work so actually there's a committee a digital asset listing group that decides this I'm actually not on that committee you don't participate in those discussions I I helped design um and give input on the process and how it was designed originally with with lawyers but I'm not actually one of the decision makers on the listing process intentionally um and so the thing that that that committee does every asset that we review we we look at a number of factors so one of them is this legal analysis about is it a commodity or security and we've developed our own internal framework from that for that we've shared that with the SEC we shared it with them before we went public you know they've been well aware of it for many years we also look at the cyber security kind of um The credibility of the of the token some of these smart contracts could have you know issues that might harm customers and so we look at we do a cyber security analysis we also do a compliance review of the asset in the founding the founding team So based on that the the committee which has a diverse set of skills of different people in finance and cyber and legal and all kinds of things they make the listing decisions the SEC says in its complaint that you rush that process that that coinbase sort of started coinbase actually started fairly conservatively with Bitcoin and with a small much smaller set of tokens while everybody else in the space is going wild listing a zillion things and trading derivatives and all kinds of crazy stuff and you were pretty conservative but over time you listed more and more and more and possibly let the standards and let the analysis slip is that how do you respond to that well we've rejected over 90 percent of the assets we've reviewed so I think that's a pretty that's a that's a good start and then I feel pretty comfortable about the the analysis I think as the SEC goes in to look at it well it really has the court goes in to look at it because the SEC has already seen all of this um I think they'll find it to be a very rigorous analysis we have you know basically a stack of paper on every single asset we've ever decided to list and the irony of this is that we were continuously asking them during this period can you give us more clarity that like that's how it's supposed to work like the regulator publishes the rules and then everybody has to follow them right so you have to remember that there were no rules we couldn't really get any feedback from them about was this asset okay was that not why right and so with them sort of abdicating that responsibility we essentially had to create our own process and I think we did a really good job of that working with some of the best legal Minds in the world and so I think it's it's pretty unfair and I think this is not a good fact pattern for them that a you know a jury or a judge would look at is to say look this company was formally petitioning you for clarity they met with you 30 times they developed their own internal framework working with the best lawyers in the world and you never gave them any feedback on it and then you hit them with this enforcement action that that's not fair and that's not good for America coinbase has a venture arm that invests in tokens and other things does it invest in anything that's traded on the platform um I don't I don't know actually the exact I don't want to get I want to make sure I give you a specific answer but I think most of those have been just standard Adventure investments in um in startups so that's not a factor in the listing decisions is whether coinbase has or doesn't have a position in the company or the Toca well we don't take any listing fees and I yeah as far as I know on the digital asset listing group they don't look at our personal uh coinbase Venture investment it's not a factor you talked about the rules and the clarity and what the rules should be what's wrong with the Howie test it's been around for you know since 1946 it covers a whole lot of things it started with orange groves but it covers stocks and all kinds of stuff and has been deployed in a bunch of different places and the original kind of idea of it was for it to be flexible is not supposed to be we're going to make a a determination about this specific thing it's supposed to be flexible because the court knew that Securities and trading would evolve over time what's wrong with it how does it fail to account for the specific needs of crypto yeah so I think it's a great starting place and we basically need case law to sort of help us understand some of the the nuances of how this applies in a crypto environment so an example is that um encrypt of many of these assets there is no common Enterprise or Central Authority that would be responsible to say for issuing disclosures or something like that like the ethereum network there's not any one group that controls it it's decentralized right um and so we actually uh we put out this petition to the SEC people can Google it if they want um you know just I think it's coinbase petition to the SEC you can kind of read it we actually a lot of these are really technical legal questions but there's about 40 different areas where we felt like the law the current law was a little unclear on this like um you know decentralization utility what does that mean in Context of Open Source software right who would issue the disclosures if there was a if there's not a common Enterprise right um so there's a lot of open questions like that which we don't feel are have been answered and that's the kind of clarity do you think that there there is a role for those disclosures for that kind of information to investors because right now there isn't right there isn't any disclosure about any of these tokens besides white papers and other stuff um certainly not standardized disclosure do you think there should be some disclosure leaving aside who does it or how it happens yeah so for crypto Securities absolutely there should be the normal set of disclosures um even for some of these things which may be classified as Commodities I think disclosures are could be an important part of that and actually one of the nice things about crypto is that you can actually go look at a lot of this data on chain it's public there's a couple companies that are trying to find ways to sort of better aggregate it and sort of say okay here's the distribution of all the people who own it how long have they owned it you know what price did they buy it at are they insiders or are they you know just third parties you know and trying to get better insights so anyway I think that kind of thing is is really important and again it needs to be updated for this new technology which is a little different than what's come before it sounds like what we're talking about here though is a question of degree right so there are some back to the sort of baseball card and apple thing there's a big hazy middle there and you the SEC would like to put the line here and you'd like to put the line somewhere to the right of where the SEC wants to put the line but fundamentally you're still thinking about the distinction between Commodities which are okay to trade in the way that you trade them and securities which shouldn't be it's just a question of where the line should be is that right yeah I mean I think this is what the courts and Congress need to figure out is where should that line be and honestly you know reasonable people could disagree there's probably somewhere there you know ultimately our goal is we'd like to be we're already licensed by the cftc but and we have the dormant license from the SEC we we would like to be in a world where we're just licensed and regulated by both and it's a healthy Market structure and you know maybe some of these assets would start as a security and they'd migrate the McHenry Thompson bill that kind of came out last week contemplates this idea of you know maybe we could actually have one exchange where both Commodities and securities and stable coins and by the way you know there's other things in crypto too artwork and identity and all kinds of things so these could all kind of Coexist on a regulated platform and so if you you do have a new technology that comes along it doesn't quite look like A or B it's some kind of hybrid you know that's probably why we need new legislation so if the line gets drawn here and my hand is is meant to be in between Bitcoin and ether over here and everything else over here yeah if Bitcoin and ether are the only commodities is coinbase a viable business can you just can you just say you know what forget about all the rest of it we're just going to trade Bitcoin and ether that's the business well first of all I think that would be a pretty extreme position and that's not what the rest of the world including Europe and the UK and Singapore and Hong Kong have done so let's put that aside for a minute I don't think that's that's actually I don't think that's what the law says either but um so Bitcoin and ethereum are the majority of our Revenue today um in the trading world right now we also make quite a bit of Revenue almost 50 of our revenue is from non-trading fees right um and then we also have Revenue outside of the United States right so um I guess even in that scenario yes it's we're a viable business and there's lots of things but I also think that's just not what's going to happen because that's not that's not what where Congress is headed that's not what the courts will decide you are unusual among other crypto exchanges in that 84 of your revenue is in the United States and most of the rest of them either are not in the United States or say they are not in the United States um is there some Universe in which coinbase also and bittrex did this they when they were sued by the SEC said you know what we're going to give up the US and go to the rest of the world is there some Universe in which coinbase gives up on the U.S no I mean we're we're here to stay we I created this company in the United States because I believe it's a big Market but there's also there's rule of law you know and there's a willingness to generally do the right thing even if it takes a few iterations so we are going to continue to be in the US we're going to be the leader in the U.S uh the U.S is going to get to the right outcome whether it's through the courts Congress um you know the cftc something something is going to come to fruition or maybe the 2024 elections will change this you know America has a way of healing right like you know if the winds blow this way and then four to eight years later they kind of blow the other way and eventually we get to the right outcome even if it takes a while at the same time while we're going to be the leader in the U.S we also we're going to be a multinational we're going to be we have entities in all the major Financial hubs um or many of them at this point and I want to be an American company that has a global footprint the SEC also sued binance this week of course um those are cases are similar but also different in in important ways tell us how you see your case versus binance's case and whether there's their commonalities there are places where you and they would be sort of fighting the same fight with the SEC in places where their differences yeah so um I think they're actually very different and you know it was kind of unfortunate that they were done back to back and my guess is that might have been deliberate to try to conflate the issue um but you know just to give you some examples I mean I I don't want to say anything about any other companies in the space but I'll just talk about coinbase um you know so there were no allegations in our complaint about misappropriation of customer funds or wash trading um you know there was there was no naming of me or the executive team personally um there it really was just a question on this technical matter of like you know are these Securities or Commodities and I guess it's also important to note as you said earlier too I mean coinbase is based in the US we're a public company so that means we have strict requirements around for for instance like audited financial statements so when we say that customer funds are segregated and they're backed one to one you know you don't have to take our word for it our external big four auditing firm is is looking at that you you have taken I think it's fair to say a reasonably confrontational approach for the SEC there's some there's a Twitter thread in which you said some sketchy thing things going on do you regret that approach well I wouldn't say our approach has been confrontational it is with great you know we've never relished the opportunity or the idea of like ending up in litigation with our regulator in fact quite the opposite I mean we spent um 30 meetings over the last year trying to be as helpful and collaborative as we could and really got no feedback right um we decided to become a public company which you know and shared all this information with them so and and by the way you know I have a greater deal of respect for um the people at the SEC the staff the Commissioners I think our relationship with the chair has been quite difficult honestly but there's a lot of really good people at the SEC and we've had no issue working with every other regulator out there both in the US but also internationally why is the why is the relationship with chair Gensler been difficult you know I don't know I don't want to speculate on his motives or or anything like that but um you know when I when he first came into the role I made an effort to kind of fly out there and go meet with him I don't know why the schedules wouldn't align um we made several attempts we eventually did get to meet but only virtually over have you ever had a one-on-one meeting in person with him I've never been able to meet with him in person which is which is rare um every regulator that we have I've been able to get meetings with um including the heads of government in many of these countries where we operate it may have been a covid thing at that time but it may have been other reasons too I don't know I I don't it doesn't seem like uh he he wanted to meet with us let's let's talk a little bit about the future and what a different Universe for crypto might look like you've you've talked a bunch about how crypto could be how the rules that are currently in place the how we test and other things could be applied to crypto and the legal analysis that will happen in the context of this court case but you've also talked about talking with Congress and talking and you alluded to a sort of future future Administration after the 2024 elections um if if the political system were such that it would create a new set of rules for crypto and you could sort of whiteboard from zero on what those rules might look like without having to deal with the existing framework brainstorming in your head um what what is sort of Brian Armstrong's dream regulatory structure for crypto well so the first one is we just need to get some clarity about the market structure and how you know the cftc and the SEC are both going to regulate this industry what are the boundaries um I think we also need to just bring in some basic consumer protections which are you know around wash trading prevention AML kyc um you know having audited financial statements these are just kind of best practices that can come over from traditional financial services and be applied uh to crypto and then I think we also need to get a little bit more clarity about stable coins because that's been a really big use case and um area of growth for crypto and so there's still a little bit of lack of clarity there about you know how issuance works and and things like that so it's really it's actually not rocket science this is just applying some of these really basic Common Sense ideas um to the industry and then once we have that legislation in place I think we'll start to see some of the entrepreneurs who've left the US come back and say okay I feel that we're not just going to be attacked randomly or have incredibly High legal bills at any given moment and we can actually build a business here in the US again

Channel: Wall Street Journal

Views: 294,889

Keywords: coinbase, coinbase ceo, sec, crypto, cryptocurrency, crypto industry, brian armstrong, brian armstrong coinbase, SEC, security and exchange commission, crypto market, civil lawsuits, wsj, federal regulators, international crypto exchange, illegal securities, tokens, illegal assets, trading, merit peak, sigma chain, monetary fine, lawsuits, regulation, cryptocurrency market, civil lawsuit, government agency, coinbase lawsuit, crypto marketplace, wsj exclusive, wsj interview, usnews

Id: ZjLGyWsgbTA

Length: 28min 32sec (1712 seconds)

Published: Sat Jun 10 2023

Reddit Comments

[u/colonycom]

Coinbase is really making some progress here. I believe they will come out of this stronger and refined. Let's all give them our support.

[u/cliftonixs]

Coinbase: "Hey SEC, give us regulatory clarity."

SEC: "No."

Coinbase: "Alright, we gonna do our own thing."

SEC: "No you can't do that."

Coinbase: "No problem. Wanna give us rules to follow?"

SEC: "No."

Coinbase: "Why?"

SEC: "Because we're suing you."

Good interview. I think it's interesting that Coinbase had over 30 meetings over the past year with the SEC to try and work with them to provide clarity on what is a commodity vs a security. Armstrong makes some good points like how Europe and the rest of the world has clarity on tokens yet the US doesn't. Coinbase will take SEC to court, and through that ruling, they'll determine what rules apply based on the courts and the law. So regulatory clarity will come eventually. The SEC's lawsuits are kind of a scare tactic imo. I'm with Coinbase on this. Still won't use their platform tho.

[u/conceiv3d-in-lib3rty]

The fact that Coinbase was sued the day after Binance, even though one had criminality alleged and one was over interpretation of the law, was deliberate by the SEC to vilify crypto. It’s clear as day.

[u/Timed-Out_DeLorean]

The government hates decentralized currency. They’d much rather keep us a slave to their fiat printing press.

[u/cashpig000]

Every crypto enthusiast should cheer for Coinbase because if they win, we all in (and SEC loses 🤗).

[u/Donny-Bandish]

nothing will happen to crypto. this is a nothing burger. if the u.s. banned crypto, it would trigger a recession. do you realize how much money would be lost by us citizens alone? billions upon billions. it’s not happening. gensler is just trying to scare these companies into complying with the law and making sure they aren’t doing the same shady shit FTX was doing. it’s that simple. 🥱

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[u/monaslab]

Go get em BA!

[u/SandersIncBV]

thanks, great summary and insights!