Tl:dr: Today, the SEC gave Coinbase a “Wells notice” regarding an undefined portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation. We are prepared for this disappointing development. We are confident in the legality of our assets and services, and if needed, we welcome a legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets. Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.
Today, we are disappointed to share that the SEC gave us a “Wells notice” regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation. A Wells notice is the way that SEC staff tells a company that they are recommending that the SEC take enforcement action for possible violations of securities laws. It is not a formal charge or lawsuit, but it can lead to one. Rest assured, Coinbase products and services continue to operate as usual – today’s news does not require any changes to our current products or services.
Today’s Wells notice does not provide a lot of information for us to respond to. The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so. Today’s Wells notice also comes after Coinbase provided multiple proposals to the SEC about registration over the course of months, all of which the SEC ultimately refused to respond to.
Although we don’t take this development lightly, we are very confident in the way we run our business – the same business we presented to the SEC in order for us to become a public company in 2021. We continue to think rulemaking and legislation are better tools for defining the law for our industry than enforcement actions. But if necessary, we welcome the opportunity for Coinbase and the broader crypto community to get clarity in court. Below we share more details on our attempts to engage with the SEC on registration paths, the current U.S. crypto regulatory confusion, and another reminder that Coinbase doesn’t list securities.
The SEC will not let crypto companies “come in and register” – we tried.
The Wells notice comes out of the investigation that we disclosed last summer. Shortly after that investigation began, the SEC asked us if we would be interested in discussing a potential resolution that would include registering some portion of our business with the SEC. We said absolutely yes. Specifically, the SEC asked us to provide our views on what a registration path for Coinbase could look like – because there is no existing way for a crypto exchange to register. We developed and proposed two different registration models. We spent millions of dollars on legal support to build these proposals and repeatedly asked for the SEC’s feedback. We got none. We also reiterated that we stand by our listings process – we don’t list securities today – and repeatedly invited the SEC to raise any questions about any asset at all on our platform. They raised none.
We met with the SEC more than 30 times over nine months, but we were doing all of the talking. In December 2022, we asked the SEC again for some feedback on our proposals. The SEC staff agreed to provide feedback in January 2023. In January, the day before our scheduled meeting, the SEC canceled on us and told us they would be shifting back to an enforcement investigation. We now understand that there is disagreement within the Commission itself on how to proceed with a registration path. This was just two months ago.
The investigation is still at a very early stage. We have produced documents and provided two witnesses for testimony, one on the basic aspects of our staking services and one on the basic operation of our trading platform. At no point in this investigation has the SEC told us a single specific concern about a single asset on our platform. To move to a Wells notice now, is unusual to say the least. Especially because our staking and exchange services are largely unchanged since 2021, when the SEC reviewed our S-1 and allowed us to become a public company. Our core business model remains the same.
The U.S. crypto regulatory environment needs more guidance, not more enforcement
Regulatory uncertainty in the crypto industry is getting worse. Instead of developing a regulatory framework for crypto, the SEC is continuing to regulate by enforcement only. We recently explained in an amicus brief the lack of guidance for crypto companies to follow. Nevertheless, we have continued to try and engage with the SEC. In addition to our attempts to develop a registration path, we have repeatedly, formally asked the SEC to engage in rulemaking for our industry. We filed a petition for rulemaking last summer. On Monday, we submitted another substantive comment letter in support of the petition, detailing the need for clarity around the SEC’s views of staking services and the lack of notice to the industry about any SEC concerns. Just two days later we received a Wells notice that includes our staking services – the same staking services referenced 57 times in the S-1 the SEC reviewed in 2021 when we became a public company.
Importantly, Coinbase is not the only one raising these concerns. Even courts are questioning the SEC’s inconsistent positions and lack of guidance to the industry. Federal Bankruptcy Judge Michael Wiles in the recent Voyager case shared his findings in a ruling against the SEC that makes clear that the SEC is on shaky ground when it comes to the Commission’s recent views of cryptocurrencies being a security. Judge Wiles stated in his ruling: “Regulators themselves cannot seem to agree as to whether cryptocurrencies are commodities that may be subject to regulation by the CFTC, or whether they are securities […] subject to securities laws, or neither, or even on what criteria should be applied in making the decision. This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years.”
Meanwhile, our industry continues to see new, conflicting statements from regulators instead of actual rules. The Chair of the CFTC recently testified to Congress that Ethereum is a commodity, which the public has long understood to be the case. Then-CFTC Commissioner Quintenz has said that “the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil…or crypto assets.” Current SEC Chair recently opined that perhaps BTC is the only digital asset commodity, which is entirely at odds with the position of the CFTC. If our regulators cannot agree on who regulates which aspects of crypto, the industry has no fair notice on how to proceed. Against this backdrop, it makes no sense to threaten enforcement actions against trusted public companies like Coinbase who are committed to playing by the rules. It makes even less sense to threaten enforcement actions unless an industry participant concedes that non-securities can be regulated by the SEC. That is for Congress to decide.