Photo-Illustration: Intelligences; Images: Getty Images/Coinbase
Both the best and worst thing about cryptocurrency has been that it’s still essentially a volatile Wild West, a whole bizarre Wall Street without all the rules and regulations that have made traditional finance so much less exciting (and, for a select few, lucrative) . However, on Monday, Bloomberg reported that Coinbase, one of the largest crypto exchanges in the world and the dominant US-based player, was under investigation by the Securities and Exchange Commission for essentially operating an illegal marketplace. The crux of the investigation gets to the heart of how most people buy and sell crypto in the U.S. — that is, whether Dogecoin or many of the other 150 or so cryptocurrencies available for purchase on the exchange would undergo the kind of scrutiny the company is sharing. would have to go through to say, trade their shares on the New York Stock Exchange. It’s the kind of investigation that, depending on how it goes, could have a broad, existential effect on how the crypto world is run in the country from now on.
The investigation’s existence comes at a sensitive time for Coinbase. Last week, the Justice Department indicted former Coinbase product manager Ishan Wahi for tipping off his brother and a friend, who were also indicted, before the exchange listed at least 25 different cryptocurrencies. (According to the indictment, the value of the digital assets tended to rise after the exchange announced a new IPO, and the three are accused of raking in more than $1 million in the alleged scheme.) Manhattan US Attorney Damian Williams went out of his way to address the broader crypto industry’s arguments that traditional laws and regulations do not apply to it, saying the charges “are a further reminder that web3 is not a law-free zone.”
While Coinbase was not charged with any wrongdoing – they cooperated with the investigation – the SEC filed a parallel civil suit alleging securities fraud, and this is where it all stops being petty insider trading and becomes very important to the entire crypto industry. See, if there is securities fraud involving cryptocurrencies, then there must be a security at the center of it. What Washi tipped his friend and brother to were digital assets that would ordinarily be unknown to most people – symbols that went off tickers like POWR and KROM and XY. This is not Bitcoin or Ethereum – large, publicly owned digital currencies that have no fundraising purpose.
What the SEC does in its complaint is subtle, but crucial to understanding the way crypto is likely to be deflated. Shitcoins like these apparently raise money for companies to operate. For Power, the Australian company that issued the POWR currency, “the funds raised through the token sale will enable the company to reach its development milestones,” according to the SEC. By pointing this out, the regulators are implying that these digital assets are actually securities, like shares in a publicly traded company, which would put crypto investors squarely in the world monitored by the SEC. That means Coinbase has to comply with all kinds of expensive regulations and submit to investigations that it doesn’t currently need. That prompted the exchange’s head of legal affairs, Paul Grewal, to post on the company’s blog to say that the civil charges are essentially bullshit, since the current laws apply to the pre-crypto age of investment, and that new tailored laws and regulations are required. for this market. “Instead of crafting tailored rules in an inclusive and transparent way,” Grewal wrote, “the SEC is relying on these kinds of one-off enforcement actions to try to bring all digital assets into its jurisdiction, even those assets that are not securities.”
This isn’t the first time Coinbase and the SEC have messed about what the law says they can do. Last year, the agency sent exchanges a warning that if it launched a lending program, it would sue. Coinbase’s CEO, Brian Armstrong, complained about it on Twitter, claiming that it was “sketchy behavior” at the agency. (Coinbase relented and scrapped the program). But the truth here is that dealing with the SEC is usually not a fun or clear-cut process. The agency defines the law by suing people and companies and then uses those lawsuits as a roadmap for all other companies to follow. While it may sound strange, this is how the SEC has operated for decades – especially in crypto-land. There are a few bills that have been proposed — one of them, authored by senators Kirsten Gillibrand and Cynthia Lummis, is seen as pro-industry but likely won’t pass this year, if ever, despite intense lobbying. Suing someone is a faster and easier way to make rules than waiting for Congress to pass legislation. If you’re a lawyer and need a refresher on this sort of thing, there’s even a handy little guide to the enforcement actions it’s taken against crypto companies, investors and hackers since 2012. I haven’t read them all, but I’ve covered a lot of them, and generally they point in one direction: that the SEC strongly disagrees with Coinbase’s argument that digital assets have special characteristics that exempt them from the law.
Who is right is likely to be hashed out in court, and it could take years. It’s not as if Coinbase’s argument is completely out of left field — another Washington regulator, the Commodities Futures Trading Commission, also oversees the industry, and doesn’t seem interested in imposing a wholesale change in how it operates. (Growth approvingly quotes CFTC Commissioner Caroline Pham, who disagreed with the SEC case). If the SEC is right, and all of these companies that have issued their own digital tokens have actually offered unregistered securities, this will put a huge damper on the so-called web3 industry, which has relied on the lack of rules and vague jurisdictions to create thousands of new tokens in the cryptohype tornado. Coinbase’s stock is down 14 percent on the day, and more than 80 percent since its peak in November. It’s more some of the cryptocurrencies that the company’s value tends to track. It seems the buttoned-up world of Wall Street, far more familiar with the gray suits at the SEC, doesn’t like Coinbase’s odds.
