On Monday, Coinbase filed its official protest of plans by the U.S. Securities and Exchange Commission (SEC) to expand the Investment Advisers Act of 1940 custody rules to “protect a broader array of client assets and advisory activities.” This expanded array would, for the first time, include digital assets, which registered investment advisers (RIAs) would only be allowed to store with a qualified custodian (QC), a qualification that exchanges might not meet.
When the rule was proposed in February, SEC Commissioner Hester ‘Crypto Mom’ Peirce expressed concern that the proposed change would result in “shrinking the ranks of qualified crypto custodians” and “leave investors in crypto assets more vulnerable to theft or fraud, not less.”
Coinbase’s chief legal officer Paul Grewal tweeted Monday that his company “generally agree[s] with the spirit of the proposal” and is “confident Coinbase Custody Trust Company will remain a QC even if the proposal is adopted as is.” But Grewal believes the SEC “should allow limited non-QC exposure so RIAs can trade crypto for their clients.”
Coinbase’s formal submission expands on these views, saying “substantial changes” are needed to correct the “unwarranted assumptions about custodial practices based on the Commission’s experience with securities.”
While this change isn’t contained in the proposal, the SEC requested comment on whether QCs should be limited to those under federal regulation. Coinbase Custody, which claims to handle digital assets on behalf of “roughly 25% of the largest 100 hedge funds,” is a fiduciary under New York state law. Coinbase said eliminating state-regulated entities as QCs would be “arbitrary, capricious, and contradict Commission statutory rulemaking requirements.”
Coinbase also wants the SEC to ditch a proposal requiring QCs to offer written assurances that they will “indemnify RIA clients for losses caused by custodian negligence and have insurance arrangements to ‘adequately protect’ RIA clients from such losses.” Coinbase warns that this would create “legal uncertainty surrounding standards of care” that could preclude RIAs “from investing in certain asset classes altogether.”
Coinbase also wants the SEC to distinguish between RIAs serving “sophisticated” institutional investors and those dealing with retail investors because sophisticates are “far better suited than the Commission to assess the trade-off between custodial costs and risk of loss.”
Coinbase thinks the SEC should “allow RIA client assets limited exposure to non-[QC] environments.” In Coinbase’s view, banning RIA client trades on non-qualified exchanges “does not account for why crypto exchanges pre-fund transactions or the benefits of pre-funding such as real-time settlement.”
Overall, the submission strikes a far more genial tone than the strident missives that Coinbase and Grewal have previously hurled at the SEC. Perhaps this is because the financially struggling exchange recognizes that the loss of its custodial revenue stream could prove the straw that breaks this crypto camel’s back.
On Monday, Coinbase CEO Brian Armstrong accused SEC chairman Gary Gensler of waging “a lone crusade” against crypto. “I don’t think he’s necessarily trying to regulate the industry as much as maybe curtail it … he’s created some lawsuits, and I think it’s quite unhelpful for the industry in the U.S. writ large.”
Build the wall(et)
Coinbase’s submission is but one of many filed by digital asset firms, including notorious token-pumpers/dumpers Andreessen Horowitz (a16z), which also believes that preventing RIAs from accessing non-QC platforms “will likely deprive RIA clients of the most liquid trading venues for these assets.” a16z also believes the SEC hasn’t considered whether its proposed changes “will work for crypto assets that have participatory features such as staking or voting.”
Speaking of, Coinbase customers who staked their ETH tokens ahead of the Ethereum blockchain’s recent software updates are regretting getting Coinbase involved. Last month’s Ethereum hard fork finally allowed the chain’s proof-of-stake ‘validators’ to redeem their staked ETH, but many who sent those tokens to Coinbase-hosted wallets are now reporting the funds are stuck in digital limbo.
Some validators took to Reddit to complain about their ETH not showing up in their Coinbase Wallet. A company spokesperson told CoinDesk that “our systems currently do not support deposits to Coinbase ETH addresses from external validators. Funds may be stuck until we are able to support these transactions.” How many users currently have funds ‘stuck’ in this fashion is unknown.
Gulf deep, gulf broad
Armstrong made his Gensler ‘lone crusade’ comments in the United Arab Emirates (UAE), where Armstrong is on his quest for a jurisdiction to let Coinbase behave as it likes. Armstrong tweeted several photos of himself meeting with local officials, including the UAE’s Securities and Commodities Authority CEO, while fawning over the government for publishing “a clear rule book” on digital asset regulation.
Armstrong was one of several Coinbase execs to descend on the UAE, based on the company’s view that the country “has the potential to be a strategic hub for Coinbase, amplifying our efforts across the world” and serving as a “particularly strategic bridge between Asia and Europe.”
Coinbase’s efforts outside its home market haven’t precisely produced results to date, as the company’s most recent earnings report showed nearly 89% of its revenue was derived from U.S.-based customers. Worse, the ‘rest of the world’ revenue was down nearly 60% year-on-year, more than twice the 28% decline in U.S.-based revenue.
Regardless, Coinbase is banking hard on its ‘Go deep, go broad’ expansion strategy, including the launch of a Bermuda-based derivatives-based platform offering non-U.S. customers the ability to bet using leverage. Still, Coinbase International will have to significantly boost its current maximum 5x leverage if it wants to lure crypto casino bettors from the likes of Binance.
Speaking of, the UAE’s Virtual Assets Regulatory Authority (VARA) recently asked Binance (and other crypto licensees) to supply more detailed information on its ownership structure. Seems the UAE is eager to get off the Financial Action Task Force’s naughty jurisdictions list, so if Coinbase is expecting an easy-money economic free-for-all, it might want to think again.
Brian’s weekly fix
Armstrong likes to declare that the crypto economy needs more capital, which may offer an alternate explanation behind his buttering up UAE bigwigs. The Coinbase Blog’s own pitch for the UAE notes that, along with Saudi Arabia, the UAE “holds over 70% of the [Gulf Cooperation Council’s] combined individual wealth,” along with around half-a-trillion more of “non-UAE citizen individual investable wealth.”
Speaking of individual wealth, Monday saw Armstrong unload another $1.7 million worth of his shares, bringing his year-to-date dumping tally close to $25 million. Technically, these shares were sold by The Brian Armstrong Living Trust, but since its sole trustee is Armstrong, let’s just call a spade a spade.
Armstrong has been dumping an average of around 15,000 shares per week this year, boosting his bankroll between $900,000 and $1.2 million each time. Notably, Armstrong hasn’t made a single purchase of his company’s stock since its April 2021 direct listing on the Nasdaq (during which Armstrong unloaded nearly $292 million worth of shares and which is currently the subject of an insider trading lawsuit).
Since Coinbase’s share price has cratered by around 80% since its Nasdaq debut, this would seem a prime buying opportunity for a CEO/chairman who believes his company has a bright future. The fact that Armstrong instead chooses to continue his steady drip of dumps should tell you—and any would-be investors in the UAE—all you need to know.
Liquidity drying up
Coinbase’s trading volume has been in the dumps for a while now, mirroring the overall crypto market. But things are about to worsen following Tuesday’s Bloomberg report that major market-makers Jane Street and Jump Trading Group’s digital asset unit Jump Crypto plan to scale back their activity.
The New York-based Jane Street will reportedly reduce its overall crypto expansion plans, while the Illinois-based Jump is reportedly ditching the U.S. market entirely in favor of international expansion. Both parties reportedly cited the intensifying U.S. regulatory crackdown as helping them reach their respective decisions.
Jane Street was the former corporate alma mater of Sam Bankman-Fried and several other key members of the disgraced FTX/Alameda crime ring. Jane Street was also cited in the U.S. Commodity Futures Trading Commission (CFTC) civil suit filed against Binance as one of the exchange’s three major U.S.-based institutional clients (despite Binance’s claims of banning U.S. customers).
The last thing Coinbase needs now is for the SEC to file those long-awaited unregistered securities charges. Armstrong will probably be so bummed he’ll sell twice as many shares that week to make himself feel better. Call it the crypto version of retail therapy.
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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.
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