Is the Beaxy Case A Blueprint for Action Against Coinbase?

Will Coinbase become the next crypto entity targeted by regulators?

The exchange was already served a Wells Notice by the Securities and Exchange Commission (SEC) last month.  Now, after the agency slapped charges against cryptocurrency exchange Beaxy, speculation is rife that Coinbase might be next in line.

Beaxy was a little-known operation based in Illinois. Coinbase is crypto’s flag bearer in North America and the continent’s biggest trading exchange by volume.

The difference in size doesn’t matter, however. Crypto observers and former SEC officials say that similarities in the operating structures of both outfits makes the Beaxy case a blueprint for SEC enforcement action against Coinbase.

But, while Coinbase’s operations resemble those of Beaxy at first glance, they are different in practice. The exchange has covered its bases well to evade regulatory action.    

An All-In-One Crypto Platform   

Like most cryptocurrency outfits, Beaxy ran a vertically integrated operation. This means that the company, its parent Windy, and their related entities acted as custodians, market makers, clearing agents, and broker-dealer for customers. They performed these functions without obtaining necessary licenses from the SEC.

The agency’s complaint makes a point of this. It cites instances in which Windy provided custody and brokerage services to customers without registering either as a custodian or broker-dealer. Ownership of customer assets enables platforms like Beaxy to play around with customer funds. The platform also hired market makers to provide liquidity for its in-house BXY token, according to the complaint.   

In Defense of Coinbase

Coinbase is not at risk of similar charges. The exchange purportedly keeps customer assets on the blockchains of respective tokens at “addresses controlled by Coinbase.” It’s user agreement makes clear that the “Title to supported digital assets shall, at all times, remain with you [the customer] and not transfer to Coinbase.” Further the terms make clear that none of the supported digital assets are the “property of, or shall, or may be loaned to Coinbase.”

The exchange’s custody offering, Coinbase Custody, is also separated from its retail operations based on a cursory reading of its terms that state customers holding accounts with Coinbase Custody are not covered under its Account Protection service. Coinbase also does not have an inhouse token like BXY that requires market making from outside firms.

While it may seem to act like a broker-dealer or an intermediary, Coinbase says it does not trade or facilitate trading in cryptocurrency tokens because digital asset trades settle instantly and do not require intermediaries like brokers to hold the settled securities. That position adopted by the exchange was strengthened this year, when a federal judge dismissed a lawsuit from disgruntled customers of the exchange that charged the exchange with selling unregistered securities.

To further bolster its defenses against regulation, the exchange has also acquired broker-dealer firms over the years. In its petition for clearer crypto rule making last year, the exchange said it might consider changing its operations to suit the SEC’s model through these firms.     

A Unique Ecosystem

To be sure, Coinbase is hardly in the clear as far as securities regulations are concerned. The company has subsidiaries and affiliates that engage in activities that function in concert with the exchange. But Coinbase’s incestuous dealings are hardly unique in crypto.

Still, they are permissible in an ecosystem that has very few players engaging in a largely unregulated activity. Coinbase will find it difficult to make a case for itself as more players and larger institutions begin providing crypto services.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.