Last week, the Securities and Exchange Commission (SEC) delivered its latest filing to the federal court overseeing the SEC’s civil charges against Coinbase for listing and offering unregistered securities to the public.
The SEC’s filing is a response to Coinbase’s 177-page collection of conjecture, speculation and misdirection, which unconvincingly argued that none of the tokens it lists are securities according to the Howey test and thus the SEC has no authority to act against the exchange.
Coinbase also cited the questionable new legal doctrine of ‘major questions,’ which aims to assign responsibility for significant decision-making to Congress. Coinbase appears to be hoping that the anger directed at the SEC by Congressional Republicans will result in the GOP passing legislation that pulls Coinbase’s butt out of the fire before the court can rule on the matter. (Coinbase is also lobbying hard to get Democrats on board, although that’s proving a tougher sell.)
If you ever doubted the insincerity of Coinbase’s legal arguments, consider that they continue to spout the nonsense that, because the SEC didn’t forbid the company from listing on the Nasdaq exchange in 2021, the SEC had found no legal fault with Coinbase’s token listings.
They make this argument despite Coinbase’s own S-1 filing including the boilerplate language that neither the SEC nor any other regulator “has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.”
It says a lot that a criminal offense remains Coinbase’s best argument for dismissing the SEC’s suit. As the old legal adage goes: “If you have the facts on your side, pound the facts. If you have the law on your side, pound the law. If you have neither on your side, pound the table.”
SEC pounds the facts, the law and Coinbase
The SEC’s July 7 filing notes the flawed ‘argument’ that by not objecting to Coinbase’s S-1, the SEC had “confirmed the legality of Coinbase’s underlying business activities—at that time and for all time. But Coinbase’s own actions belie these grievances.”
The SEC points out that Coinbase applied Howey Test criteria when determining whether to list an asset, meaning the exchange “adopted the very legal framework as a basis for making listing decisions that it now claims has no applicability to its activities.” Coinbase also “explicitly discouraged crypto asset issuers from using ‘problematic statements’ in their marketing materials that are ‘traditionally associated with securities.’”
Even now, Coinbase continues to warn shareholders that the assets it lists could later be deemed securities, leading the SEC to conclude that Coinbase “understood that the securities law could apply to its conduct … but nevertheless made the calculated decision to take on this risk in the name of growing its business.”
The SEC says Coinbase doesn’t dispute its lack of registration or its role as an intermediary (exchange, broker and/or clearing agency). Coinbase’s sole defense is based on its insistence that it engages in asset sales, not securities transactions, a stance the SEC claims “ignor[es] more than 75 years of controlling law under Howey.”
The SEC rejects Coinbase’s argument that the ‘investment contract’ plank of the Howey Test requires a common law contract. Courts have held that Howey applies when a ‘transaction, scheme or contract’ involves certain economic characteristics. The SEC maintains that Howey was intended as a flexible and adaptive test, with a focus on economic reality.
The SEC further notes that Coinbase “cites no case in support of its assertion that secondary market crypto asset transactions [in which customers who don’t personally issue tokens trade with each other] are exempt from the federal securities laws. And for good reason … courts recognize that the economic reality of a transaction involving a crypto asset security is not irrevocably altered simply because it happens to become available on a trading platform like Coinbase’s.”
The SEC also takes a shot at Coinbase’s attempts to invoke the major questions doctrine, arguing that Congress authorized the SEC to enforce federal securities laws. Coinbase “cites no case, and we are aware of none,” that challenges an agency’s authority to pursue statutory violations.
Finally, Coinbase “miscasts” its argument that the SEC believes the Coinbase Wallet “functions as a broker.” In reality, the SEC accuses Coinbase of engaging in unregistered broker activity by offering a digital asset staking program via its Wallet.
A pre-motion conference is scheduled with Judge Katherine Polk Failla in the U.S. District Court for the Southern District of New York this Thursday (13) at 10am. Presumably, the proceeding will be conducted under federal law, not whatever H.R. Pufnstuf rules Coinbase appears to be operating under.
Tweet delete not so sweet
While Coinbase continues to talk tough in public, enterprising internet sleuths like @Pledditor are reminding users that Coinbase CEO Brian Armstrong enjoys deleting historical tweets that espouse views which might contradict his current views.
The goal of this thread is find links via alternative archival services to all his old tweets. pic.twitter.com/9pz1Fhtdxx
— Pledditor (@Pledditor) July 10, 2023
Among the tweets consigned to the internet’s trash can over the years are his May 2019 declaration that the Tether (USDT) stablecoin “is not fully collateralized,” a finding he used to promote “more trustworthy stablecoins” like USDC, a joint production of Coinbase and Circle.
Two years after that tweet, Coinbase made the surprising choice to list the undercollateralized USDT on its exchange. Notably, they waited until a week after the exchange made its Nasdaq debut (possibly because they were worried what the SEC might think).
What’s more, Coinbase added Tether just a few months after the New York Attorney General’s Office fined Tether $18.5 million for a variety of deceptions, having found that “for periods of time [Tether] held no reserves to back tethers in circulation at the rate of one dollar for every tether.”
So, having had his early suspicions regarding Tether’s lack of sufficient reserves confirmed by an NYAG probe, Armstrong opted to list it on Coinbase anyway. A quick reminder that the SEC’s latest filing accuses Coinbase of making a “calculated decision to take on this risk in the name of growing its business.”
Armstrong infamously opted against listing BSV for reasons that have never been publicly explained. This oversight was all the more jarring considering Coinbase had adopted a habit of listing every altcoin out there (the type of coins Armstrong used to deride in now-deleted tweets). However, Coinbase’s ‘platinum’ membership status in the anti-competitive Crypto Open Patent Alliance (COPA) goes a long way toward explaining Armstrong’s rationale for keeping BSV out of his customers’ sight.
The (nearly) Six Million Dollar Man
Coinbase’s share price has been on an upward tear ever since (a) the SEC followed the Commodity Futures Trading Commission (CFTC) in filing civil charges against Coinbase’s local rival Binance.US, and (b) a bunch of traditional financial giants filed applications for BTC spot trade exchange traded funds (ETF) citing Coinbase as their ‘surveillance partner.’
The net result is a more than doubling of Coinbase’s share price since the year began. Never mind that these latest ETF applications aren’t any more likely to succeed than previous ones, which the SEC rejected due to rampant BTC price manipulation on exchanges like Binance, where the vast majority of BTC trades occur.
Regardless, the market continues to express faith in Coinbase’s future, a faith that Coinbase insiders appear to lack. On July 3, Armstrong dumped a whopping $5,829,848 worth of his shares, more than triple the usual amount of his bi-weekly sell-off. The same day also saw additional sales by Coinbase’s chief legal officer Paul Grewal, chief accounting officer Jennifer Jones and director Rajaram Gokul.
The insiders are likely only too aware that Coinbase’s upcoming Q2 earnings report will show no slowing of the company’s downward financial spiral. Oppenheimer analysts recently projected Coinbase’s Q2 trading volume will be down 56% from the same period last year as retail customers haven’t forgotten how badly they got burned during the last ‘crypto’ bubble.
Could these insiders simply be taking advantage of a temporary spike in price to cash some chips? Sure. But if these insiders truly believed in the ETF fairy, they’d hold off selling and redeem their shares for an even greater reward in the glorious future that awaits just over the horizon. Unless, of course, it turns out to be yet another mirage.
It’s old advice but it will serve you well: whenever you hear this time is different, don’t walk, run.
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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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