On Monday, the U.S. Securities and Exchange Commission (SEC) filed its response to a U.S. Third Circuit Court of Appeals order affirming Coinbase’s demand for a speedier response to its information request. Said request was filed in July 2022 based on Coinbase’s claim that the SEC had failed to provide adequate regulatory clarity on how digital assets fit into the U.S. investment ecosystem.
The SEC’s filing states straight off that Coinbase failed to demonstrate that it’s owed “a clear and indisputable right” to a speedier response than normal. The SEC reminds the court that “no statute or regulation requires the Commission to take such action on a specific timeline. Nor is there any precedent supporting Coinbase’s request.”
The SEC notes that Coinbase’s original request is not even 10 months old, and Coinbase supplemented aspects of its request three months ago, further amending those aspects just weeks ago. The SEC adds that Coinbase’s own request claims the issue at hand is a “necessarily complicated endeavor,” which would seem to justify the SEC taking time to get things right.
Coinbase accused the SEC of having “secretly decided to deny the petition but is refusing to say so to avoid judicial review,” an allegation the SEC calls “baseless.” The SEC adds that nothing in U.S. securities law imposes an obligation on the SEC “to issue the broad new regulations regarding ‘digital assets’ Coinbase has requested.”
At Monday’s meeting of the Federal Reserve Bank of Atlanta’s Financial Markets Conference, SEC chairman Gary Gensler was asked about the agency’s alleged reluctance to publish new digital asset rules. Gensler stated that “the rules have already been published,” reiterating his view that existing securities laws already cover digital assets.
Coinbase’s chief legal officer Paul Grewal took to Twitter to demonstrate that he’d failed to actually read the SEC filing, claiming that the agency had “told the court that rulemaking may take years and they’re in no rush.” Grewal also claimed the SEC “acknowledged that it will continue to use enforcement actions as a substitute for rulemaking for the foreseeable future.”
John Reed Stark, former chief of the SEC’s Internet Enforcement unit, had his own view of the agency’s filing, calling it “a masterclass on securities regulation and legal brief composition.” Stark rubbished Coinbase’s petition as “a subterfuge and an anemic attempt to incite the mob under false pretense.”
A new report from Berenberg claims the SEC will “soon” launch its expected enforcement action against Coinbase for offering unregistered securities to the public. Coinbase’s other revenue streams, including staking services and interest from custodying users’ USDC stablecoins, could also be “caught up in the SEC’s crypto-industry dragnet in the near future.”
(Speaking of staking services, Coinbase announced Tuesday that it had “temporarily paused ETH staking reward payouts as we resolve a technical issue.” In an update, Coinbase said it had identified the unspecified issue and was “working on a fix to resolve within the next 48-72 hours.”)
Despite its dire forecast, Berenberg advised against shorting Coinbase shares, noting that nearly one-quarter of its free-floating shares are already sold short. You know, when that large a slice of the investor community expects Coinbase to fail, maybe Coinbase does have a right to be paranoid.
Continental 48 advisors
Apparently aware that it brought a knife to this legal gunfight, Coinbase recently established its new Global Advisory Council, which “brings together top leaders to provide invaluable insights and strategic expertise to the Coinbase leadership team.”
This Council belies its ‘global’ ambitions by being entirely composed of U.S. citizens (reflecting the fact that Coinbase does nearly 90% of its business with U.S. customers). These include former U.S. Sen. Patrick Toomey, former Rep. Tim Ryan, former Rep. Sean Patrick Maloney, Chris Lehane (chief strategy officer at Katie Haun’s venture capital firm Haun Ventures) and John Anzalone, founder of Impact Research Polling.
The Haun Ventures connection is highly synergistic, given Coinbase director Katie’s previous views on the value of investing in projects that issue bespoke tokens. Back when she was a general partner at a16z—the VC kings of unloading utility-free tokens (via Coinbase) on retail customers—Katie said “the majority of our funds are deployed in tokens.” Have to wonder how often Lehane will suggest ‘list more tokens’ as the cure for all Coinbase’s ills.
NCET puts exchanges on notice
Coinbase could soon find itself under fire on a different flank. The Financial Times released a new interview this week with Eun Young Choi, director of the U.S. Department of Justice’s National Cryptocurrency Enforcement Team (NCET). The NCET was formed last year to spearhead the DoJ’s efforts to tackle crimes involving digital assets.
Choi told the FT that the NCET would increase its focus on digital asset exchanges that refuse to impose sufficiently strict anti-money laundering (AML) and know-your-customer (KYC) protocols. These exchanges are allowing “all the other criminal actors to easily profit from their crimes and cash out in ways that are obviously problematic for us.”
Choi didn’t single out any exchanges by name, but warned that the NCET would target both minnows and whales. Choi said any exchange that had adopted the attitude that “we’ve grown too big to fail” was in for a rude awakening. The DoJ is in no mood to “give someone a pass” simply because an exchange had “amassed a significant market share” through a lax regulatory posture.
While Choi’s statements appear directed towards certifiable rogues like Binance—whose sketchy behavior Coinbase appears to wish to emulate—recall that Coinbase paid $100 million just this year to settle a probe by New York state regulators into shoddy AML/KYC practices.
There’s also the fact that Coinbase continues to list the Tether (USDT) stablecoin, which could prove of interest to federal authorities. The Wall Street Journal recently reported on Tether execs’ engaging in bank fraud and facilitating terrorist financing.
Coinbase came under friendlier fire last week via the exchange’s public explanation of why it had yet to list the PEPE meme coin. PEPE, one of the BTC blockchain’s new BRC-20 tokens, soared in value this month thanks to a FOMO hype cycle but has since shed over half of its artificially inflated price.
The brouhaha began when Coinbase issued a newsletter that attempted to explain the “memecoin frenzy.” Citing the history of rugpulls and scams associated with these types of tokens, Coinbase urged customers to exercise caution, singling out PEPE’s “comically huge supply of 420 trillion tokens.”
But Coinbase also noted the token’s Pepe frog mascot and that meme’s historic co-option by far-right hate groups. Cue massive outrage from PEPE fans on social media, who accused Coinbase of misrepresenting the token project. A #deletecoinbase campaign was swiftly launched and quickly gained transaction on ‘crypto Twitter.’
Coinbase’s Grewal soon issued a groveling apology, saying “we screwed up and we are sorry.” Coinbase also purged the references to hate groups from its newsletter, adding a disclaimer that the previous references “did not provide the whole picture of the history of the meme.”
Coinbase has yet to list PEPE on its exchange, but we suspect the desire for revenue might eventually trump concerns that customers could get torched when this predatory house goes up in flames.
Buy buy buy
Surprisingly, last week saw a Coinbase insider buck the trend by purchasing shares instead of dumping them. Coinbase co-founder Fred Ehrsam bought around $50 million worth of the company’s stock on May 10 in six transactions, bringing the total number of insider purchases over the past three months to … six.
Ehrsam’s purchases were made as Coinbase shares rebounded from their sub-$50 mark in early May. However, the shares resumed their negative trajectory this week, falling 5% on Tuesday to close below $58.
Over the past three months, insiders have conducted 49 share sales, with CEO Brian Armstrong responsible for the bulk of these. Armstrong is currently averaging around $1 million in weekly sales, a handsome haul for someone whose company has now gone five consecutive quarters without a profit.
You and Bri are going to live forever
A recent SEC filing indicated that, while Armstrong’s base salary hasn’t budged from its $1 million mark since 2020, he billed the company for over $6.3 million in ‘personal security measures’ last year. That’s more than triple his protection budget from 2021, which was itself higher than in 2020.
These outlays dramatically outpace the security billings for other high-profile U.S. CEOs, with the notable exception of Meta’s Mark Zuckerberg (who, it must be said, has generated an awful lot of ill will over the years). Armstrong may suspect that his rampant share-dumping and inability to steer Coinbase back to profitability has made him a target of irate investors.
Armstrong recently gave a TechCrunch interview regarding his significant investment in a project he co-founded called NewLimit, which aims to “increase the number of healthy years each person lives by epigenetically reprogramming cells.” (Ehrsam is also an investor.)
Armstrong was asked whether he became interested in extending his life following the realization that hearses don’t have luggage racks. Armstrong said his “high level thought is that if you’ve made money in software, it’s good to put money back into society in ways that can help improve the human condition.”
We’re sure Coinbase investors would prefer that Armstrong fix his company’s profit/loss statements before creating a generation of tech-bro Methuselahs. We suspect investors are equally suspicious that Armstrong believes he’ll need to add decades to his life before he’s able to announce a Coinbase quarterly profit.
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