Coinbase Launches Vigorous Response to SEC’s Wells Notice

The San Francisco-headquartered crypto exchange submitted a counter-response to the Wells Notice served by the US Securities and Exchange Commission (SEC). Coinbase’s statement conveyed on Thursday, April 27, petitioned the security watchdog against pursuing enforcement action. 

Coinbase Warns of Irreversible Reputation Damage for SEC

The statement indicates the preference for enforcement action against Coinbase would negatively portray SEC. The crypto exchange led by Brian Armstrong cites pursuit of the intended action on Coinbase would create irreversible confusion given the SEC’s past stances.

Armstrong indicates that the journey to becoming a publicly traded entity and 2021 listing on the Nasdaq involved SEC’s approval. The chief executive argues that the SEC’s approval signals Coinbase’s business was lawful. 

Coinbase’s response argues that had the Garry Gensler-led SEC believed its core business contravened the US securities law, it would have disapproved the application to go public. The response argues that SEC is obligated by law to avert entities engaging in unlawful businesses from the listing. Imposing the ban would safeguard the investing public. 

Coinbase is warning the SEC that implementing enforcement action would likely cause reputational harm to the regulator. The company cites its longstanding efforts to comply with federal securities laws. Action against Coinbase would likely discourage other crypto entities from compliance.

Is SEC Punishing Coinbase for Continually Demanding Regulatory Clarity? 

Coinbase submits that the aftermath of the enforcement would be a narrative of a crypto exchange that consistently sought regulatory clarity and voluntarily complied with the existing laws. The response revealed that Coinbase voluntarily furnished the SEC with detailed information regarding its business. Shockingly, the Commission would then utilize the information against Coinbase to extinguish a critical portion of its business. 

Coinbase disputes SEC’s assertions alleging the exchange lists securities. Also, the response dismisses that the Coinbase Wallet product constitutes a broker and the staking services mirror a securities offering.

Coinbase executive heading litigation, Katherin Minarik, indicated that the crypto exchange response threw the ball back to the SEC’s court. However, she admitted that the SEC has six months to decide whether to prefer the charges.  

Minarik observes that SEC staff will now examine the response submitted by Coinbase with the resulting recommendation to the commissioners on whether to terminate or pursue enforcement action. Nevertheless, the commissioners will subject the recommendation to a vote with the final say on the enforcement status.

Minarik supports the need for regulators to closely monitor the actions of various players within the digital assets sector. The head of litigation at Coinbase considers SEC’s scrutiny justified by the implosion of FTX in November 2022. She laments that FTX collapsed owing to apparent mismanagement attributed to Sam Bankman-Fried, currently battling a litany of lawsuits. 

SEC’s Wells Notice Considered Vague, Though Welcomes Regulatory Focus

Coinbase criticizes SEC for the unusual conduct despite admitting to lacking authority to enforce actions against it in 2021. Minarik questions the change of tune despite Congress not approving any crypto regulatory developments. 

Minarik emphasizes that Congress is yet to issue a new legislative authority. Consequently, SEC has no rules’ basis concerning crypto to warrant the agency embrace an enforcement path unavailable in 2021. 

Coinbase has its usual quarterly reporting in February projected to become a net beneficiary of 2023, given the increased regulatory focus. The letter to Coinbase came weeks following SEC’s decision to fine Kraken $30 million, citing staking-as-a-service offered to US citizens without fulfilling the requisite registration process. 

Coinbase Way Forward

Coinbase dismissed the Wells Notice served by the SEC as vague and broad. The Thursday statement shows that the San Francisco-based crypto exchange will battle it against SEC. It echoes the announcement that it would sue SEC on Monday, April 24, citing a petition for rulemaking submitted in July 2022. The legal action seeks SEC to submit its response to the plea sought by the Armstrong-led crypto exchange regarding regulation clarity. 

Armstrong would, on April 25, reveal his active involvement in the Stand with Crypto campaign. He invoked the commemorative NFT to acknowledge that the crypto community demands sensible crypto policy from the regulators. 

Coinbase response to SEC coincides with the exchange setting sights abroad, citing the heat experienced within the US regulatory environment. In support, several procrypto politicians lament the loss of innovation offshore as crypto firms exit the US.

The chief legal officer Paul Grewal ruled out releasing litigation against the securities watchdog. Instead, he admits that the financial system and digital assets sector are still updating, a reason Coinbase is continually building.   

Editorial credit: rafapress / Shutterstock.com