Today, we are disappointed to share that the SEC gave us a “Wells notice” regarding an unspecified portion of our listed digital assets, our staking service, Coinbase Prime, and Coinbase Wallet after a cursory investigation. A Wells notice is the way that SEC staff tells a company that they are recommending that the SEC take enforcement action for possible violations of securities laws. It is not a formal charge or lawsuit, but it can lead to one. Rest assured, Coinbase products and services continue to operate as usual - today’s news does not require any changes to our current products or services.
Today’s Wells notice does not provide a lot of information for us to respond to. The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to.
Although we don’t take this development lightly, we are very confident in the way we run our business – the same business we presented to the SEC in order for us to become a public company in 2021. We continue to think rulemaking and legislation are better tools for defining the law for our industry than enforcement actions. But if necessary, we welcome the opportunity for Coinbase and the broader crypto community to get clarity in court. Below we share more details on our attempts to engage with the SEC on registration paths, the current U.S. crypto regulatory confusion, and another reminder that Coinbase doesn’t list securities.
The SEC will not let crypto companies “come in and register” – we tried.
The Wells notice comes out of the investigation that we disclosed last . Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none.
We met with the SEC more than 30 times over nine months, but we were doing all of the talking. In December 2022, we asked the SEC again for some feedback on our proposals. The SEC staff agreed to provide feedback in January 2023. In January, the day before our scheduled meeting, the SEC canceled on us and told us they would be shifting back to an enforcement investigation. We now understand that there is disagreement within the Commission itself on how to proceed with a registration path. This was just two months ago.
The investigation is still at a very early stage. We have produced documents and provided two witnesses for testimony, one on the basic aspects of our staking services and one on the basic operation of our trading platform. At no point in this investigation has the SEC told us a single specific concern about a single asset on our platform. To move to a Wells notice now, is unusual to say the least. Especially because our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company. Our core business model remains the same.
The U.S. crypto regulatory environment needs more guidance, not more enforcement
Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only. We recently explained in an the lack of guidance for crypto companies to follow. Nevertheless, we have continued to try and engage with the SEC. In addition to our attempts to develop a registration path, we have repeatedly, formally asked the SEC to engage in rulemaking for our industry. We filed a last summer. On Monday, we submitted another substantive in support of the petition, detailing the need for clarity around the SEC’s views of staking services and the lack of notice to the industry about any SEC concerns. Just two days later we received a Wells notice that includes our staking services – the same staking services referenced 57 times in the S-1 the SEC reviewed in 2021 when we became a public company.
Importantly, Coinbase is not the only one raising these concerns. Even courts are the SEC’s inconsistent positions and lack of guidance to the industry. Federal Bankruptcy Judge Michael Wiles in the recent Voyager case shared his findings in a ruling against the SEC that makes clear that the SEC is on shaky ground when it comes to the Commission’s recent views of cryptocurrencies being a security. Judge Wiles stated in his ruling: “Regulators themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities […] subject to securities laws, or neither, or even on what criteria should be applied in making the decision. This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years.”
Meanwhile, our industry continues to see new, conflicting statements from regulators instead of actual rules. The Chair of the CFTC recently testified to Congress that , which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has that “the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.” Current SEC Chair recently opined that perhaps BTC is the only digital asset commodity, which is entirely at odds with the position of the CFTC. If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules. It makes even less sense to threaten enforcement actions unless an industry participant concedes that non-securities can be regulated by the SEC. That is for Congress to decide.
Coinbase does not list securities
The bottom line remains: Coinbase does not list securities or offer products to our customers that are securities. Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that we shared in detail with the SEC as part of our public listing. This process includes an analysis of whether the asset could be considered to be a, and also considers regulatory compliance and aspects of the asset. 90%+ of assets that we review are not ultimately listed on Coinbase because they do not meet these standards. Coinbase has rejected hundreds and hundreds of assets because they did not meet these standards. This is exactly why we were so eager to engage in registration discussions with the SEC, to find a home for assets like these that can’t currently be listed on any exchange.
As we’ve also explained before, our services are not securities under any legal standard, including the which assesses whether a product is an investment contract. We first presented our staking services to the SEC in 2019. Then twice more in 2020. We were largely met with silence. Until this investigation, we had heard no concerns at all from the SEC about our staking services.
Coinbase Wallet is a technology, not an exchange or broker or centralized platform. This misunderstanding of crypto products, assets and services is another example of the need for comprehensive crypto regulation in the U.S. that understands the technology.
Tell us the rules and we will follow them. Give us an actual path to register, and we will register the parts of our business that need registering. In the meantime, the U.S. cannot afford for regulators to continue to threaten the good actors in the crypto industry for doing the same legal and compliant things they’ve always done. This unfair approach will only drive innovation, jobs, and the entire industry overseas. At our core, we are the very same company that we were on April 14, 2021 when we became a public company at the end of the lengthy process with the SEC itself. We remain confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.
In the meantime, Coinbase will continue to do what we do best: updating the financial system by building the most trusted products and services to advance our mission of creating more economic freedom and opportunity around the world.
Cautionary Statement Regarding Forward-Looking Statements
This blog post contains “forward-looking statements” including, statements relating to the timing, outcome and possible impact on Coinbase’s business model of the SEC’s Wells notice and any litigation that may result therefrom and Coinbase’s ability to comply with the laws and regulations that currently apply or may later apply given the evolving and uncertain regulatory landscape. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially, including those described in the “Risk Factors” included in Coinbase’s 2022 Annual Report on Form 10-K and other SEC filings. New risks and uncertainties emerge and it is not possible for us to predict all risks that could have an impact on any forward-looking statements here. Except as may be required by law, Coinbase undertakes no obligation, and does not intend, to update these forward-looking statements after the date of this communication.
About Paul Grewal
Paul Grewal is the Chief Legal Officer of Coinbase where he is responsible for Coinbase’s legal, compliance, global intelligence, risk management and government relations groups. Before joining Coinbase, Paul was Vice President and Deputy General Counsel at Facebook. Prior to Facebook, Paul served as United States Magistrate Judge for the Northern District of California. Paul was previously a partner at Howrey LLP, where his practice focused on intellectual property litigation. Paul served as a law clerk to Federal Circuit Judge Arthur J. Gajarsa and United States District Judge Sam H. Bell. He received his JD from the University of Chicago Law School and his BS in Civil and Environmental Engineering from the Massachusetts Institute of Technology.
Nov 29, 2023,
3min read time
Nov 28, 2023