The U.S. Securities and Exchange Commission (SEC) notified Coinbase, the largest cryptocurrency exchange in the U.S., of an upcoming enforcement action earlier this month. Coinbase's chief legal counsel explained in a blog post that Coinbase has tried repeatedly to get regulatory clarity from the SEC, but the SEC has not been communicative, and many industry insiders have expressed confusion over the SEC's move. Sandeep Nailwal, co-founder of the blockchain platform Polygon, said he doesn't understand why the SEC would target a company that has demonstrated its eagerness to comply with regulations.
"So confused with this notice to @coinbase. Coinbase is the gold standard of compliance in crypto. As a regulator, why would you go after the most compliant company of the industry? Doesn’t it discourage everyone else trying to be U.S. compliant?" Nailwal wrote in a March 23 Twitter post.
Coinbase Chief Legal Officer Paul Grewal said in a blog post on the Coinbase website that the Wells notice, which is how the SEC notifies a company of a possible incoming enforcement action, was vague in its description of exactly which of its services warrant the enforcement action.
"The SEC staff told us they have identified potential violations of securities law, but little more," Grewal said. "We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so."
Grewal said that over the course of the last year, the SEC has repeatedly declined to provide feedback on or raise questions about Coinbase's listing process or proposals Coinbase had sent the SEC.
One source of confusion over the Wells notice is the fact that Coinbase went public in 2021 and had to get approval from the SEC in order to do so. Grewal said in the post that the Wells notice contained a reference to Coinbase's staking services – "the same staking services referenced 57 times in the S-1 the SEC reviewed in 2021 when we became a public company."
Coinbase CEO and co-founder Brian Armstrong discussed the Wells notice in a Twitter thread, saying, "While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court. We are proud to stand up for our customers and the industry in these moments. Going forward, the legal process will provide an open and public forum before an unbiased body where we will be able to make clear for all to see that the SEC simply has not been fair, reasonable or even demonstrated a seriousness of purpose when it comes to its engagement on digital assets. In the meantime, Coinbase will continue to do what we do best: Build the most trusted products and services in order to advance our purpose of updating the financial system and creating more economic freedom in the world."
Armstrong has previously expressed his desire for regulatory clarity in interviews and blog posts. In a February interview with the Austin Journal, Armstrong said he welcomes regulations and believes they will help bring more trust to the crypto industry, but some people with political or personal agendas are holding up the process.
“Some regulators don’t want regulatory clarity for crypto, because they are actually trying to curtail the industry,” Armstrong said. “Harsh rhetoric and regulation by enforcement, without creating clear rules for everyone to follow, has pushed much of the industry outside the U.S., which has resulted in American investors and businesses being harmed.”
Armstrong wrote in a December blog post that he believes regulation that provides clarity and a level playing field, while leaving room for innovation, will enable the crypto industry to reach its potential in benefitting other industries.
Armstrong isn't the only crypto CEO who has been calling for regulatory clarity. Changpeng Zhao (CZ), the Canadian CEO and co-founder of Binance, the largest crypto exchange in the world, said in a blog post last year that believing "regulation is bad for crypto" is a "simplistic view," and he believes that well-guided regulations serve to protect consumers while still encouraging growth and innovation in the crypto sector.
Media personality Glenn Beck said on Blaze TV that the SEC has refused to respond clearly to Coinbase's requests for guidance on how to be compliant. He said that the SEC's Wells notice is not a case of the law being enforced, because it is not clear what the law is.
U.S. Bankruptcy Judge Michael Wiles wrote in a March 11 decision that there is an absence of clear regulatory guidelines for digital asset issuers in the U.S., which has created a "highly uncertain" environment for those companies, many of which, Wiles pointed out, have been operating for years "without being subject to clear and well-defined regulatory requirements."
"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 that are subject to securities laws, or neither, or even on what criteria should be applied in making the decision," Wiles said. "This uncertainty has persisted despite the fact that cryptocurrency exchanges have been around for a number of years." He also pointed out that the SEC and the CFTC have sometimes acted in ways that contradict each other when it comes to the crypto industry.