Why did the SEC send a Wells notice to Coinbase?

The Securities and Exchange Commission sent a Wells notice to Coinbase yesterday, offering Coinbase to submit information on Coinbase’s listed digital assets, as well as Coinbase Earn, Coinbase Prime and Coinbase Wallet. 

The Wells Notice is named after the Wells Committee, formed in 1972, and named after John Wells who served as SEC advisory committee chair. According to the SEC’s Enforcement Manual, a Wells notice is a communication from the staff to a person involved in an investigation that: (1) informs the person the staff has made a preliminary determination to recommend that the Commission file an action or institute a proceeding against them; (2) identifies the securities law violations that the staff has preliminarily determined to include in the recommendation; and (3) provides notice that the person may make a submission to the Division and the Commission concerning the proposed recommendation. 

In simpler terms, this means that the SEC is notifying Coinbase of upcoming enforcement actions.

Following the announcement of SEC action, Coinbase CEO Brian Armstrong posted a thread explaining the relationship between his company and the regulators and announced the company will contest any enforcement in court. 

In addition, the Chief Legal Officer of Coinbase, Paul Grewal expressed disappointment with the fact that the SEC is considering courts over constructive dialogue. In a separate thread, Grewal explained that Coinbase has met with SEC over 30 times over the past 9 months, sent a petition asking for more regulatory clarity to which it did not receive any response nor any valuable feedback on what to change. 

He goes on to compare a number of other jurisdictions where Coinbase successfully jumped over the regulatory hurdles and became a licensed and regulated crypto business, including Australia, Singapore and Germany. Coinbase has also managed to obtain DCM and DCO licenses from CFTC.

Additional confusion is caused by the fact that the SEC declined to identify which assets offered on Coinbase they deem to be securities. This is concerning as Coinbase claims to have a rigorous review process where more than 90% of tokens asking to be listed end up being declined because they fail to meet the standards and requirements to be traded on the platform. 

When it comes to the staking service Coinbase offers, the company has presented it to the regulators from the SEC in 2019 and two times during 2020 and received no complaints until now. 

A Wells submission regarding the Coinbase Wallet is especially dumbfounding as the wallet is a technological tool rather than a platform or an exchange and it goes to further illustrate the deep misunderstanding of crypto products by the regulators. 

The SEC sending a Wells notice to one of the most compliant crypto companies, together with the past couple of months of actions of Fed, FDIC, and OCC, is another example of the regulatory pressures through enforcement that the current administration is undertaking against law abiding crypto actors in this space. 

A number of coordinated efforts in the past few months have appeared, visible and obvious enough that they are being dubbed Operation Choke Point 2.0. Bank accounts being closed, with no notice and explanation, leading to unbanking of crypto companies together with actions of SEC are another example of the current administration’s attempts to regulate crypto through enforcement.

This and similar examples showcase the aversion that regulators have to crypto companies, users and the sector as a whole. Whilst many industry actors have insisted on regulatory clarity and cooperation, the agencies and regulators have been adding fuel to regulatory uncertainty in the United States. Not only has this been bad for the industry and retail consumers of crypto related products but has been further contributing to the uncertainty that exists in the sector. This approach has been hurtful to the companies, talent and consumers and is going to further drive innovation and jobs to jurisdictions more open and capable of hosting and prospering from this emerging industry. 

As a consumer advocacy group that champions innovative technology and smart policies, the Consumer Choice Center has published its State Model Policy to provide state and local legislators with a template of consumer-friendly policy on Bitcoin, cryptocurrencies, and decentralized finance. 

One in 5 adults in the US owns crypto and having these consumers use services hosted in other countries will make them less safe and more susceptible to many negative externalities that could be avoided by having clear and functional regulation in their home country. 

Only by introducing regulatory clarity, avoiding regulation by enforcement and communication with law abiding companies in the crypto space can the US make sure that businesses and talent are staying in the country rather than fleeing overseas where innovation will be more appreciated. 

Aleksandar Kokotović is the crypto fellow at the Consumer Choice Center.



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