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Coinbase (NASDAQ: COIN) wants to see Securities and Exchange Commission (SEC) Chairman Gary Gensler’s personal emails, while Gary wants to see ‘crypto-focused’ venture capital groups hauled into court on unregistered broker-dealer charges.
On July 3, attorneys representing the Coinbase digital asset exchange in its legal fight with the SEC filed a letter with U.S. District Court Judge Katherine Polk Failla of the Southern District of New York. The letter was a response to the SEC’s motion to “quash Coinbase’s subpoena for the production of documents to Gary Gensler in his personal capacity.”
On June 14, Coinbase served a subpoena requesting “documents on core matters in this litigation,” including personal communications that Gensler may have had with “issuers of digital assets.” On June 28, the SEC replied to this request, saying the subpoena “seeks nothing of relevance, imposes an undue burden on the SEC, and strongly disincentivizes public service,” the latter due to the subpoena being “an improper intrusion into a public official’s private life.”
Coinbase claims the SEC—which insists that it doesn’t represent Gensler in his personal capacity—balked at confirming whether Gensler had any “responsive communications in his personal capacity” regarding digital assets. Coinbase accused Gensler of refusing “to undertake any search to answer that threshold question.”
Coinbase points to the fact that Gensler has occasionally voiced his personal views on digital assets’ regulatory status, although he usually states at the time that his views are his own and not necessarily those of the SEC. Prior to his being named SEC chair, Gensler was a professor at MIT, a period in which Coinbase claims Gensler was “at the center of discussions with market participants” regarding digital asset regulation.
Coinbase claims these discussions are “probative of the objective understanding of the public and market participants regarding what conduct the securities laws prohibit.” As such, Gensler’s personal emails are “an appropriate source of discovery,” but the SEC “now contends all such communications are in Mr. Gensler’s capacity as [SEC] Chair.”
Coinbase’s chief legal officer Paul Grewal offered his personal take on the SEC’s refusal to cooperate, tweeting that Gensler was trying to avoid “exposing how the SEC’s enforcement action offends the Constitution’s requirement of due process.” The SEC maintains that Gensler shouldn’t be unduly burdened by Coinbase’s fishing expedition, possibly because he’s too busy preparing additional actions against ‘crypto’ scofflaws.
If all the other judges jumped off a cliff, would you?
On July 3, the SEC responded to Coinbase’s recent appeal to get Judge Failla to consider the recent ruling in the SEC’s suit against the Binance exchange in the U.S. District Court for the District of Columbia. On June 28, Judge Amy Berman Jackson ruled that secondary sales of Binance’s in-house BNB token didn’t necessarily qualify as sales of unregistered securities.
The SEC argues that Judge Jackson “made no findings at all about any of the 12 crypto assets at issue” in the Coinbase case. The SEC further argues that Jackson concluded that “the question of whether a secondary market transaction could constitute an investment contract under the Howey test depends on the facts and circumstances of the particular transactions at issue.”
As a result, the SEC believes the Binance ruling (a) supports Failla’s March 27 opinion that the agency had “sufficiently pleaded” that Coinbase engaged in the unregistered sale of securities and (b) “permits all of the SEC’s claims under the Exchange Act—the same ones at issue here—to go forward.”
Achtung Gary
Coinbase appears to believe the old adage that the best defense is a good offense, as the exchange filed Freedom of Information Act (FOIA) requests targeting both the SEC and the Federal Deposit Insurance Corporation (FDIC). The FOIA requests seek documents and communications related to both agencies’ digital asset-related investigations and enforcement actions.
The requests were filed on Coinbase’s behalf by History Associates Inc., a Maryland-based firm that conducts research and discovery services for corporations, government agencies, congressional offices and non-profit groups.
The SEC request offers up a sampling of the ‘crypto’ sector’s reliably OTT rhetoric, including references to a “scorched earth enforcement war,” the SEC’s “submit or else’ threats,” “a purposeful effort to destroy an industry by demanding the impossible and prosecuting companies that fail to achieve it,” etc. All of the above heinous acts are allegedly intended to “drive the industry into the ground.”
(We eagerly scanned the text for allegations that the SEC also made cruel jokes about Coinbase CEO Brian Armstrong’s shiny dome being brighter than his company’s future, but no luck.)
History Associates attempted to force the SEC to produce documents related to two SEC investigations that concluded in settlements in 2018 and 2020. The agency denied these requests, citing possible interference with “ongoing and active enforcement proceedings.”
History Associates claims this argument is “tailor-made to frustrate” Coinbase’s efforts to find evidence of the SEC’s “enforcement blitzkrieg against the digital-asset industry.” (We very much hope the SEC’s entire legal team does the Basil Fawlty Nazi goosestep when they next march into Poland, er, court.)
Choke on your lies
The FDIC request raises similar concerns while also referencing “Operation Choke Point 2.0,” a conspiracy theory that represents peak ‘crypto’ martyrdom. The request calls OCP2.0 an “unlawful” scheme “designed to deprive the digital-asset industry of the banking services it needs… to operate in today’s economy.”
History Associates cites an FDIC Office of Inspector General (OIG) report from October 2023 that found the FDIC had sent ‘pause letters’ to supervised financial institutions starting in March 2022. The letters asked the institutions “to pause, or not expand, planned or ongoing crypto-related activities.” The OIG criticized these letters due to the FDIC’s failure to “establish an expected timeframe” for assessing ‘crypto-related’ risks and informing these institutions of its findings.
The FDIC denied History Associates’ requests for copies of these ‘pause letters,’ which the group insists are “a critical component of Operation Choke Point 2.0.” The alleged impact of these letters is that “it has become exceedingly difficult for digital-asset firms to obtain banking services.”
Conveniently, the filing leaves out the admitted illegality of the banks that wholeheartedly embraced ‘crypto’ and went belly-up as a result, requiring the FDIC to bail out their customers.
For whom Gary’s bell tolls
While Coinbase and other SEC-targeted platforms hope to sandbag the agency in paperwork until the U.S. Supreme Court rules that the federal government is unconstitutional, ‘crypto-focused’ venture capital groups may be next on Gensler’s hit list.
VCs like Andreessen Horowitz (a16z), Paradigm, and countless others have been the leading drivers of the utility-free token-bubble economy. Many VCs invest early in a project, receive a ton of project-specific tokens, fan the PR flames about the project’s alleged potential, wait until the masses of investing fools rush in, then sell at or near the top and move on to the next grift while the project (and its token) sinks like a stone. (Coinbase Ventures goes one step better by listing the tokens it invests in on the exchange and charging fees to trade them.)
In a July 2 episode of the Unchained Crypto podcast, BlockTower Capital chief investment officer Ari Paul claimed that the SEC “has launched a bunch of investigations into VCs for acting as securities dealers.” Paul went on to say that “my own read and legal analysis is that the SEC is absolutely right on that.”
Paul sketched a scenario in which a project team tells a VC, “We’re going to give you tokens at a 50% discount to where we think this will trade in two months [when the lock-up period ends]. In exchange, you will promote that token.”
In such a scenario, Paul says the developers are “hiring the VC as a marketer. The VC is acting as an investment banker… they’re getting paid a 100% markup to distribute the token. That is acting as a securities dealer. And from an ethical perspective, you’re acting as a pump-and-dumper very explicitly.”
To avoid such legal entanglements, Paul suggests projects “eliminate the lock-up entirely.” While this isn’t likely to eliminate “games that get played,” Paul believes this would “at least make it not institutionalized.”
Sorry, but playing games—and playing retail ‘investors’ for suckers—is what ‘crypto’ is all about. (The other podcast guest was Delphi Labs founder José Macedo, who in a pre-VC life, used to cheat at online poker and now believes “launching tokens is undoubtedly one of crypto’s killer apps.”) Pump worthless function-free tokens to the moon, dump on retail, count your winnings, and set up the next grift. Institutionalized? You’re the one who’s crazy.
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