Maybe I should have listened to Abe and just been silent...
Just a Friday rant on the Coinbase Wells Notice
Hey everyone- I’m a day late on the Coinbase Wells Notice, but that just gave me extra time to write my rant. Thanks for reading and let me know if you believe
p.s. if you’re new here- send me a note here or at @gtlnotes. looking forward to connecting!
“Better to remain silent and be thought a fool than to speak and to remove all doubt ” - Abraham Lincoln
Top of Queue
Coinbase
This didn’t really feel like news. That’s not to say it wasn’t a big deal, but pretty much everyone all saw this coming. I mean Brian Armstrong wouldn’t have just posted this for fun back in Feb.
I was more surprised it took this long for the SEC to actually act. They’ve been busy though... Anyways, the SEC finally sent Coinbase a Wells Notice on Wednesday evening. I know.. I’m a day late, but I had already written yesterday’s post and was off to get a beer by the time this hit the tape.
Some background
I think we should take a step back first. I didn’t know what a Wells Notice was before last month. So in case you haven’t googled it yet,
A Wells notice is a formal letter issued by the U.S. Securities and Exchange Commission (SEC) to a company or individual that indicates that the SEC is planning to bring an enforcement action against them. The notice typically provides the recipient with a summary of the SEC's investigation and a warning of the potential legal violations that the agency believes have occurred.
The notice is named after John Wells, who was an SEC official in the 1970s and developed the process for notifying individuals or companies of potential enforcement actions. The purpose of the Wells notice is to give the recipient an opportunity to respond to the SEC's allegations and to present evidence in their defense before the agency decides to take legal action. It is also intended to encourage settlements and avoid unnecessary litigation.
Great simple enough. A couple of quick thoughts.
Didn’t John Wells write The West Wing? He did, but different John Wells
Coinbase has already said they don’t intend to settle to in a way it defeats the purpose
The Wells notice is supposed to provide “a summary of the SEC’s investigation.” But that’s one of the things the industry is up in arms about. The notice is pretty broad..
Coinbase’s defense
That’s all there is to it. They don’t identify any specific activities. Presumably, they were more specific on the call they reference though. Maybe not though? This is Coinbase’s chief legal officer:
Ok, this kinda seems unfair. But it actually gets worse. Here’s an excerpt from Coinbase’s blog post on the SEC letter..
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.
You almost have to give Coinbase credit for continuing to knock on the SEC’s door. To be fair, they didn’t really have any other options though.
It seems as though Coinbase’s argument can be seen from a few different angles.
We don’t list securities. We’ve gone over the Howey Test before. Coinbase doesn’t think they’re securities, the SEC does. Ok fine. I have my opinion but these people are all much smarter, albeit likely have a bit more of an agenda than I do. I guess I’m happy to leave that up to the courts. If Coinbase wins, good for the industry. If the SEC wins, eek.. That’ll make things tricky.
Why are we doing this now? This is the one I can really relate to. Coinbase was founded in 2012. They went public in 2021. They filed an S1 to do that. The SEC approved that S1. They have not been hiding their business doings. They actually sent it in a letter to the SEC. The SEC said okay. But now they’re saying never mind. That’s a legitimate gripe. People time, money, and energy building this company and industry. Regulators really shouldn’t just be able to say never mind two years later.
Here’s Brian Armstrong arguing that same point:
And then Ram Ahluwalia from Lumida Wealth Management decided to take it upon himself to see what the SEC said about staking during their most recent guidance for digital assets issued in… 2019?! Ok, we’ll get to that in a minute.. but the point is the SEC never gave any guidance on staking. Now it wasn’t as popular in 2019 as it is today, but it was already gaining traction. For example, Ethereum announced in 2015 that it was planning on moving to a proof of stake model by 2020.
Why now?
The last question people are asking is why now? Well, that part is pretty clear. Crypto is down. People have lost money. So now the SEC is coming in with their cape to save the day.. but if they believe all this, then why now is still a valid question. But more in the context of where were you when crypto was up 5x in 2020.
Where do we go from here?
The headlines will fade but this won’t be handled overnight. Coinbase will keep building and the SEC will keep performing regulation by enforcement. This does matter though. In a way, Coinbase is putting the industry on its shoulders. But in another sense, really it’s just putting the US’s role as the home of crypto on its shoulders. If it loses, regulators in Europe, Africa, the Middle East, and Asia are happy to welcome these companies in. We’ve already talked about this though in a previous post.
What about Bitcoin and Ethereum?
One of the underlying themes of all this that I was confused by was that people would always say Bitcoin and Ethereum weren’t securities. The Bitcoin I understand. There is no company or agency issuing the tokens. But Ethereum kinda has that right? Well, in June 2018, the SEC's director of corporate finance, William Hinman, stated that Ethereum was not a security, primarily because the network had become sufficiently decentralized over time. Interesting, that seems a bit subjective. If the SEC could go back on messages they sent two years ago, is five years ago out of the question? People seem to think so. Matt Levine summarized it best though (you had to read his footnotes for this gem):
One pet theory of mine is that if you hung out with SEC Chair Gary Gensler and got a few drinks into him, he would tell you “obviously Ethereum is a security.” I have never tried this, but come on. However, that ship has sailed and everyone agrees that, for US regulatory purposes, Ethereum is not a security.
I wish I wrote that. I agree 100%.
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Coinbase receives a Wells Notice - link, link1, link2
SEC investigating Coinbase for its Earn product, wallet service and exchange activity - link
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