Notes 3/24: Coinbase

Coinbase has major beef with the Securities and Exchange Commission (SEC).

After the company was served with a Wells Notice by the agency for selling unregistered securities, its chief legal officer Paul Grewal took to social media and wrote posts to air grievances.

On his company’s website, Grewal wrote that his exchange – the biggest venue by trading volume in North America – was served with legal threats when it asked for regulatory clarity on rules for listing securities.

The SEC has maintained that existing rules are sufficient as roadmap for assessing and listing cryptocurrencies. But crypto businesses claim that their tokens, festooned with fancy and meaningless verbiage, such as “DAO” and “decentralized”, are different. They claim that their tokens are not securities and deserve a new set of rules.

Grewal has doubled down on this stance. “The bottom line is that Coinbase does not list securities or offer products to our customers that are not securities,” he wrote.

Then, he goes on to claim that Coinbase has a “rigorous process to analyze and review” each digital asset for “information security” and “regulatory compliance” before listing them on its exchange.

The Rigorous Digital Asset Framework

Just what is this process?

Right now, it is difficult to know. The link for a digital asset framework used to evaluate tokens leads to another asset listing page which, in turn, fails to educate on the criteria used to evaluate tokens on its platform. This does not mean that the exchange shirks from its duty.  

Back in 2018, Coinbase launched a digital asset framework with a publicity blitz. The framework consisted of generic questions about tokens from their management and mission to their legal status and the provenance of their code. The questions were vague, but it was a start.  

That framework disappeared from the company’s website in 2021 and has been replaced by a short “Important factors to consider” page.

The company seems to have veered in the opposite direction with the latest effort. If one were to go by the text, it has even precluded the possibility of rejecting tokens for listing at its exchange.

“Here’s a list of common reasons we may take longer to review your application. But this is just a guide: your application may still be approved, even if one or more of these statements are true for your asset,” the post reads. By the way, one of the factors to consider before applying for token listing is whether the “developer or issuer team has made statements that the asset is a security.”

Risky Assets

At the beginning of 2018, Coinbase listed less than five assets on its platform. After loosening its token listing restrictions on the platform, the number of assets has jumped to 254.    

And so, we have the specter of 253 assets, except for bitcoin, at risk of being regulated out of existence on Coinbase. The most prominent example is ether, Ethereum’s native token. It is used in a heavily centralized Proof of Stake consensus mechanism that makes it a strong candidate for security status.

Coinbase’s edited framework has also allowed dubious tokens like SuperFarm to sidle through to a listing. With its centralized governance and flimsy economics, the token is a cinch for a security listing.

And what is there to discuss about Dogecoin, also listed on Coinbase? A token that has no demonstrable value, is rudderless, but still commands a market capitalization of $9.9 billion in crypto markets. Was it also subject to the rigorous process that Grewal references in his post?

A Six Year Wait

Six years ago, in 2017, the SEC published a comment letter about decentralized autonomous organizations (DAO) tokens being securities.

In that letter, the agency also specified that “any entity or person engaging in the activities of an exchange, such as bringing together the orders for securities of multiple buyers and sellers using established nondiscretionary methods under which such orders interact with each other…must register as a national securities exchange or operate pursuant to an exemption from such registration.”

The intervening period has witnessed an explosion in the number of cryptocurrencies available to investors. It has also contributed to fat profits in Coinbase’s balance sheet. Now might be a good time for the exchange to start playing by the rules instead of playing martyr.

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