> are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them.
This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?"
It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.
> far more applicable to the question "then why were they allowed to go public?"
The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.
Would you really want a big government agency to decide on the merit of your business ehen you IPO? That seem like a good way to increase IPO's hurdles and slow down innovation.
> want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more
Investment banks would love this. It’s pro bono legal advice.
If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
No, it's asking an agency to clarify its own rules.
If I, as a ham radio enthusiast, find an unclear section of the FCC rules I expect to be able to contact someone and ask what the agency's understanding of it is. They wrote it after all.
For example, if they wrote 5-15Mhz, I might wonder if they mean inclusively. Does that cover 15Mhz, or just 14.9999?
I'm not expecting them to preemptively rule on all legal cases which depend on this, just on their interpretation of their own words.
But for big enough companies, some amount of taxpayer-paid analysis makes sense. It ultimately benefits consumers.
Isn't analyzing the S1 "pro bono legal advice" to begin with?
And they did have legal opinions, just not from the SEC that is still almost entirely refusing to evaluate crypto tokens. Would a no action letter have been feasible?
Probably not, given the integrated broker-exchange-custodian model. But that’s the point. We specifically outlawed that in 1934. Coinbase was counting on rules being changed in the midst of regulatory inertia.
My understanding is that having that structural separation is part of what is required to be registered as a securities exchange, and Coinbase is being sued for being an unregistered securities exchange. (That's why the question of whether crypto tokens are securities is important in this case.)
It is a criminal offense to represent that because the SEC acknowledged the IPO it also approved of the business: it is even written in the Coinbase's IPO prospectus, as Molly points out...
QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia
Alesia:
All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question.
Alesia:
So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders.
Alesia:
So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction.
---
The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities.
> The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk.
It's that they are unregistered as any of those things.
> 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
The SEC apparently won't decide if Ethereum is a security so it seems pretty complicated to me. I'm not going to insist the answers are obvious in such a legal minefield.
> It's being sued because it's trading a lot of things that aren't BTC or Eth.
Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity.
If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...
When Coinbase did its S-1 it said that it was trading digital assets - not securities and not unregistered securities. It did say that those assets may be considered securities under future regulatory inspection.
The SEC doesn't rule on things. They make rules (not laws), but they don't decide those things. That is the domain of the judicial branch - not the SEC.
The SEC can say "I consider X to be a security" but it's the judges that apply those rules and decide if the proper regulations are followed.
The SEC, as part of the legislative branch makes the rules to follow under its creation as part of the Securities and Exchange Act of 1934. It can bring things to be enforced or decided to the judicial branch - it isn't the judge or jury.
It would be improper for the SEC to make claims that haven't been decided by judicial branch. The SEC can say "we consider digital assets that can gain value by actions of others to be securities" but its consider - saying "yes, ETH is a security" is something for a judge to decide, not the SEC. The way that is done is for the SEC to take a company that is trading what it considers to be an unregistered security to retail customers to court.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?"
It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.