Coinbase’s (NASDAQ: COIN) insistence that there is no legal path toward digital asset licensing in America took a hit this week after a broker-dealer secured approval.
On Monday, Coinbase submitted the latest legal filing in its bid to compel the U.S. Securities and Exchange Commission (SEC) to more swiftly respond to the digital asset exchange’s demands for ‘regulatory clarity.’ Coinbase launched this Quixotic pursuit last July based on its view that the SEC was slow-rolling its request for information on the SEC’s approach to regulating digital assets.
Last week, the SEC filed its own submission with the U.S. Third Circuit Court of Appeals, effectively telling Coinbase to cool its heels and wait in line like everyone else. On Monday, Coinbase filed its response to this brushback pitch, saying “at a minimum, the Court should retain jurisdiction to monitor the agency’s progress toward a decision.”
As usual, Coinbase offers more bluster than sound legal arguments. Coinbase accuses the SEC of simultaneously claiming that it hasn’t made up its mind on the exchange’s demands while SEC chairman Gary Gensler publicly states that “the rules have already been published.”
Gensler has indeed stated his view that digital assets fit perfectly well within existing securities law, leaving Coinbase convinced that the SEC’s claim to be ‘actively considering’ Coinbase’s petition is a sham. “The SEC is talking out of both sides of its mouth, and it is wrong at each end.”
Coinbase further argues that the SEC’s delay in issuing a response “is indefensible given its decision to pursue an aggressive, accelerating enforcement campaign” against digital asset firms. In March, the SEC issued a Wells notice to Coinbase indicating that an enforcement action was in the pipeline based on Coinbase’s ongoing sales of unregistered securities to the public.
Coinbase claims Gensler “has demanded—under threat of enforcement suits seeking punitive sanctions—that digital asset developers and platforms ‘come in and register.’ But the SEC refuses to promulgate rules that would enable the industry to know the SEC’s standards for determining whether digital assets may be securities or provide a workable path to register when required.”
And yet, at least one company has somehow managed to navigate this long and winding road that Coinbase finds so impassable (largely because following this path would undo Coinbase’s business model of pushing utility-free tokens on an unsuspecting public).
Stealing Coinbase’s fire
On Tuesday, Prometheum Inc proudly announced that its subsidiary Prometheum Ember Capital (PEC) “has received a first-of-its-kind approval from the Financial Industry Regulatory Authority (FINRA) to operate as a special purpose broker-dealer (SPBD) for digital asset securities.” FINRA is an independent self-regulatory organization (SRO) that licenses and regulates broker-dealers, but its actions are overseen by the SEC.
FINRA’s approval will allow PEC to serve as a “qualified custodian” for digital asset securities for both retail and institutional clients. The SEC recently proposed new restrictions on who/what could serve as a qualified custodian of digital assets, a step vehemently opposed by Coinbase, given its increasing reliance on custodial revenue.
Prometheum Inc is a New York-based blockchain firm co-founded by co-CEOs Aaron and Benjamin Kaplan. The company was “created to bridge the gap between traditional and digital markets,” promoting mass adoption of digital assets by “building Wall Street 2.0.”
In 2021, Prometheum received FINRA approval for its Alternate Trading System (ATS). The platform will go live later this year as “a vertically-integrated, blockchain-enabled platform for the issuance, trading, settlement, and custody of digital asset securities.”
Aaron Kaplan told Bloomberg that Prometheum was built on the thesis that “digital assets are securities and the best way to regulate them is under the federal securities laws.” Kaplan told Traders Magazine that the “tried and tested” federal rules are “the best way forward to ensure that investors are protected, markets are fair and everyone has an even playing field when it comes to information in the digital asset space.”
It’s unclear what digital assets Kaplan’s company will focus on, but Gensler has suggested that BTC may be the only token that isn’t a security (not everyone agrees with him), a view that would preclude Prometheum from dealing in the largest digital asset by market cap. It also puts Prometheum on a collision course with exchanges like Coinbase, who are desperate to prove that all tokens (including BTC) aren’t securities.
Prometheum isn’t alone in getting FINRA’s good housekeeping seal. On May 5, FINRA approved OTC Markets Group’s application to allow broker-dealers to trade digital assets on its OTC Link ATS. OTC Markets CEO R. Cromwell Coulson cautioned that it will be “some time” until the necessary infrastructure develops but the FINRA approval “furthers our mission of operating regulated markets for broker-dealers and issuers of securities.”
Bottom line, it seems there’s a rather large hole in the arguments made by Coinbase and others that the SEC’s door is barred to digital asset firms seeking registration. It’s also more proof that these firms’ constant begging for ‘regulatory clarity’ is little more than a desire to perpetuate the inadequate lack of oversight the sector heretofore enjoyed.
Without mentioning any names, Kaplan suggested to a crypto outlet that companies having difficulty registering with the SEC “often have skeletons in their closets and their previous actions weren’t necessarily in line with federal securities laws.” Unlike others, Prometheum “waited to get the proper approvals before moving forward with our business, and we believe we have a clean slate, so to speak, compared to the legacy crypto providers.”
CFTC commish rebuffs ‘light touch’ label
The SEC isn’t the only U.S. regulator with which Coinbase has clashed. In 2021, shortly before its listing on the Nasdaq exchange, Coinbase was fined $6.5 million by the Commodity Futures Trading Commission (CFTC) for “reckless false, misleading or inaccurate reporting” as well as wash trading during the company’s early years.
There’s some regulatory infighting between the CFTC and SEC over who gets primacy in oversight of digital assets. Sam Bankman-Fried, disgraced founder of the collapsed FTX exchange, was among the crypto luminaries who lobbied for the CFTC to take point on this issue, based on the popular assumption that the comparatively under-funded CFTC would have more of a ‘light touch’ in policing criminality than the SEC.
Such a view doesn’t sit well with CFTC commissioner Christy Goldsmith Romero, who told Reuters this week that “‘light touch regulator’ would never be written on my tombstone.” Romero also denied the “turf war” narrative that allegedly pits the CFTC and SEC against each other.
Romero added that there was “a lot of fraud” in the digital asset sector, perhaps too much for any single regulator. “There’s just no way we can police all the fraud, but we’ve got to do something.” Romero said crypto accounts for roughly one-fifth of the CFTC’s enforcement actions, including cases brought against FTX and Binance.
Deep thoughts, with Brian Armstrong
Coinbase recently expanded access to its Coinbase One subscription service to the U.K., Germany and Ireland (with dozens more jurisdictions expected to follow). For the low, low price of $30/month, Coinbase One subscribers can enjoy zero-fee trading on certain digital assets, higher rewards for staking their assets, and other perks. And you can pay your monthly fees in Tether!
The expansion is part of Coinbase’s ‘Go Broad, Go Deep’ policy, which aims to diminish Coinbase’s excessive reliance on U.S. customers, from whom it derives nearly 90% of its revenue. Thus the recent launch of Coinbase’s Bermuda-based exchange and the offering of perpetual futures contracts that aren’t permitted stateside.
Coinbase’s uneasy relationship with its home country has led it to heighten efforts to get both public opinion and elected officials on its side. Monday saw the launch of Crypto: Moving America Forward, a national campaign aimed at convincing ‘Muricans that only Coinbase can save us from the fiscal clutches of Godless Chinese Communists™.
As part of this campaign, Coinbase released a new short video series (aka commercials that will run on ‘popular Sunday shows’) featuring CEO Brian Armstrong discussing why everyone should just leave him and his company alone because they’re doing really great things that everybody really loves and will make the world better and besides it’s really mean to be mean to Brian who is selflessly dumping his Coinbase shares in order to fund a longevity start-up aimed at extending the lives of people like Brian because The (Longer) Life of Brian means a better world and doesn’t the Wonderful World of More Brian sound like something everyone should want to strive for? Doesn’t it? DOESN’T IT?
Thank you for coming to Brian’s Ted Talk.
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