Bankless - SEC vs. Coinbase with Coinbase's Chief Legal Officer, Paul Grewal

Starting point is 00:00:04 Bankless nation, war has been declared on crypto. Today, the SEC announced charges against Coinbase for operating an unregistered securities exchange, broker, and clearing agency. A coin is down 10% on the news. We have Paul Graywell on the show. We had him on six weeks ago when Coinbase was originally given a well's notice from the SEC now that day has come. We're bringing him back onto this show now that the lawsuit has been filed. And we're going to get to him in just a moment. But first, a moment to talk to these fantastic sponsors that make the show possible.

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Starting point is 00:02:59 the chief legal officer at Coinbase. I'm sure Paul is a great guy. Whenever he is on the show, it's usually not for a great reason. Paul, welcome back to Bankless. Hey, David. It's great to be back on. Thanks for having you. Paul, so today's the day, huh?

Starting point is 00:03:16 Well, a lot's happened today for sure. There has been no shortage of activity over here at Coinbase. But in a lot of ways, this was a day we knew that would come. And so we've been preparing for it for a very, very long time. Yeah, so the SEC served a well's note. to Coinbase six weeks ago, that's when we last talked. Today's the day that that Wells noticed finally came into a fruition for a suit. Is there anything new here? Like this is, you guys were prepared for this all along. Is there anything that's a surprise today for you guys?

Starting point is 00:03:46 No, I don't think there was much in the substance of the complaint that was a surprise at all. You know, the SEC did charge Coinbase with a number of violations of federal securities laws. you know, the honest reaction I had when I first got a copy of the complaint this morning, David, was finally, finally, I now at least know what it is that we are accused of because as you and I talked about six weeks ago, Coinbase has been operating in the dark, largely because the SEC has refused to tell us until this morning exactly what products and services give it concern. So in a certain way, it was a moment of great relief more than anything else. Yeah, so that answer is actually my next question about like, when did you know this action was going to be filed?

Starting point is 00:04:31 So it sounds like you found out today that this lawsuit was going to be today. The timing of this is interesting because, Paul, you were a little bit busy today. What was up with the timing of the SEC with the choice to drop this lawsuit today? Well, you say the timing is interesting, David. I'll say it's curious. I'll leave it at that. The fact of the matter is I learned about this complaint about, I don't know, 45 minutes before. I was scheduled to walk over to Capitol Hill and testify before the House Agriculture Committee on a draft bill that was released last Friday.

Starting point is 00:05:03 So, yeah, it's interesting, curious, pick your word that the SEC chose this morning of all days to file the loss. Yeah, and this draft bill is a bill that would provide clarity and regulation to the industry that we would much like to have clarity and regulation for. And so it's just perhaps interesting that now is one of the biggest pieces of news that the crypto regulatory industry has in the last year or so. Okay. Yeah, the bill is actually quite interesting and quite important. It will provide for the very first time a real market structure for digital assets, including both digital asset commodities and digital asset securities.

Starting point is 00:05:45 It will provide a pathway for registration, serious oversight, real protection for consumers and investors, a lot of the things that we have been clamoring for for many months, if not many years in the industry. And if anything, David, this morning's lawsuit only proved the point that we were discussing before the House Agriculture Committee, which is rather than develop and issues reasonable rules that everybody can live with in order to bring crypto inside the regulatory perimeter, one part of the federal government has chosen a very different path, a path that relies entirely on a regulation by enforcement campaign. Yeah, the juxtaposition could not be clear.

Starting point is 00:06:27 The law in question would provide exactly what we were asking for in the crypto industry to prevent exactly from what is happening with Gary Gensler and the SEC and this lawsuit with Coinbase. I want to read out a tweet that is circling around crypto Twitter because I think at this point we're beyond reasoning with the SEC, at least that's how I feel personally. So this tweet reads, let's be clear. The SEC complaint doesn't mention this. there's currently no way for a platform like Coinbase to register as a securities exchange,

Starting point is 00:06:54 broker or clearing agent. That's why they, Coinbase, has been begging the SEC for years to give them a path to compliance. Instead of working constructively with U.S. market participants to come up with a working model and knowing that Congress is actively considering legislation to do the same, the SEC sues. No allegations of fraud, just accusing Coinbase of failing to do the impossible. failing to do the impossible. I don't know to what degree you have the freedom to speak. Gary Gansler knows this is impossible, right? And so my question is like, what's the motivation?

Starting point is 00:07:30 What is the end game here? Because they're putting Coinbase in a rock at a hard place. They're saying these commonly listed assets that every exchange has are securities. There seems to be a dead end here. What's your perspective on the actual, like what does the SEC want, judging by the actions? Well, I can't look inside of anybody's heart or head and know exactly what they're feeling or thinking. But what I can say is that you're absolutely right, David, as things currently stand today, not only Coinbase, but no operating exchange or other intermediary can register with the SEC in a way that would allow it to list and trade registered digital asset securities. And that's not just me saying this as the chief legal officer of Coinbase.

Starting point is 00:08:15 As it turns out earlier today in the testimony that was presented at the House Agriculture Committee hearing, the chief legal officer of Robin Hood, Dan Gallier, made a very similar point in that like Coinbase, Robin Hood also has registered broker dealers. But like Coinbase, it has nothing to list or trade on them because there's no way for issuers to practically register under the current regime. It's one of the reasons why we file our petition for rulemaking back in July. And it's one of the reasons we've been banging on the SEC. door to work with it to develop a sensible path to registration that will work for everyone, including investors and consumers. What I'm confused about, Paul, is why Gary has so much confidence. They already are going after XRP, which is its own beast of a fight. But now they've picked fights with Coinbase and Binance, the two largest crypto exchanges in the industry. what trick does Gary have up his sleeve?

Starting point is 00:09:16 Why does he feel so confident that he can do this? Well, as I've said all along, the SEC chair is extremely intelligent, extremely sophisticated, and should never, ever be underestimated. I found it very interesting today, however, that at least four or five times during the hearing that I attended and testified at, the chair of the CFTC actually presented his own testimony earlier in the proceedings. And at least four or five times by my count, Chair Benham, the chair of the CFTC, repeated over and over again that Ethereum, ETH, is a commodity, not a security.

Starting point is 00:09:54 Now, you follow these issues closely enough to know, David, that Chair Gensler has refused to answer that question, even when he himself has been testifying before the Congress. So the contrast could not be stark between the rest of the federal government, many, if not all of the states, almost all of the other countries that have taken a serious look at crypto regulation. And this one part of this one branch that seems to have a very different attitude and approach to sensible regulation. So with the Wells notice that it was around six weeks ago, the Coinbase said that the SEC refused to say which tokens were securities. So one of the things that has happened in the last two days with this Binance and Coinbase suit

Starting point is 00:10:37 is that tokens have actually been named, specific tokens. Like the, the, the, the, the commonly discussed tokens that are on crypto Twitter, like Solana, Maddo, Cardano, tokens that I hold, tokens that many bankless listeners hold. Is there any insight as to how the SEC picked this set of tokens? Well, I have very little insight for a couple of reasons, David. One is the complaint does not provide much, if any, detail on why and how these assets, but not others somehow qualify as securities under the Howie test and federal law. It's a question. It's a lot. It's, It's also quite interesting, David, that despite the chair's insistence that Ethereum might in fact be a security, notwithstanding what everyone else seems to have concluded, Ethereum was not charged in this particular plane that was filed against us, or as I understand it, against finance. Here's the other thing that's really, really interesting, David, about the assets that the SEC chose to accuse, at least in our case.

Starting point is 00:11:37 They didn't charge XRP historically. They didn't charge XRP in the finance completely. cleaned. Finance has, at least as I understand it, has listed XRP for some time as well. So it's really, really challenging. I'll pick my words carefully to understand the rationale that the SEC is relying upon, which to my mind suggests it's really, really challenging to understand why the leadership of the SEC is so confident in this legal analysis across a whole range of these issues. Yeah, you say challenging. I like the word chaotic. How can we can't pattern match when the SEC is going after Ripple, deeming it a security, but leaves Ripple out in an exchange that is currently listing Ripple, talking about finance, of course. So when the SEC declared Ripple XRP S security,

Starting point is 00:12:25 Coinbase and most other exchanges delisted it. Now in this particular suit, there's many more tokens, and all of these tokens also have much more public support than Ripple ever. did, will Coinbase be delisting these? Is there a strategy here? I know you guys have only had so much time to think about this, but what's your guys' approach to this? Well, we have only had just a very little amount of time to fully analyze these issues. But I will say this. The decision to list or delist is one that we continuously engage in. We always consider new facts and circumstances. And so as we have before and as we will continue to do going forward, We will take this new information and again, once again, evaluate whether or not the listing these assets is appropriate as non-securities.

Starting point is 00:13:15 Here's the thing, though, David, I think that sometimes gets lost. We want to be able to list assets which qualify as securities. It's one of the reasons why we've been banging on the SEC's door asking for rules for many months now. It's also one of the reasons why I testified today in support of this initial approach that the House Agriculture Committee and the House Financial Services, the committee together have proposed. It goes a certain distance, I would argue a long distance, towards addressing so many of the fundamental challenges that all of us have, whether you're talking about XRP, MADC, or any of the other assets that the SEC has seemingly arbitrarily charged as securities. We're eager to get to a regime where strong standards are put in place,

Starting point is 00:13:59 strong consumer protections will apply, but there's a pathway for not just the coin basis of the world, but for issuers and others in the crypto economy to understand that even if an asset may initially be a security for one reason or another, it can evolve over time. It can decentralize in a way that makes it plain that it should be treated as a non-security or as a commodity under a very different set of rules. Learning about crypto is hard. Until now, introducing Metamask Learn, an open educational platform about crypto, Web3, self-custity, wallet management, and all the other topics needed to onboard people into this crazy world of crypto. Metamask Learn is an interactive platform with each lesson offering a simulation for the task at hand,

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Starting point is 00:18:21 that would allow the government to see certain assets in the Binance case. We have not been served with any such notice, and I'm confident that we won't because the standards that would allow the SEC to make that request or application, simply don't apply in our case. I can't speak to the finance case, but I'm confident that we will have a full and fair opportunity to defend ourselves in court in our case, and we intend to take that opportunity up. So, Paul, what are the next steps here?

Starting point is 00:18:50 Is there, do we have a date? Does Coinbase have a date with Gary in court? Like, how do, what can we expect in the next coming days, weeks and months? Well, the, you know, the feeling of relief I mentioned very, at the very beginning of this podcast, David, actually went beyond just knowing finally what products are being accused. It's also a feeling of relief that we now, along with the SEC, are both parties in a court proceeding overseen by a federal judge. And that means that a federal judge, a neutral, a respected third party is going to have the final say on how this case proceeds, what claims have merit, what claims do not. And frankly, whether the SEC has been following the law in its arbitrary campaign of enforcement going on how many, many months now. So as to how quickly this will all proceed, that is ultimately a decision for the court. And of course, we will respect whatever schedule the court sets. I think, though, that you and other listeners, can look to other cases that have been brought by the SEC over the last couple of years and understand that these cases can take not just many months, but in some cases, many years. And so there is not likely to be a very quick resolution in at least our case because we intend to defend ourselves. It's all the more reason why, David, that we believe so strongly that

Starting point is 00:20:11 there needs to be sensible rules in place. There needs to be a legislative framework adopted so that these issues get vetted in an efficient, low-cost, high credibility manner, as opposed to one-off cases brought in court that take months or years to reach their conclusion. Well, call me an optimist, Paul, but if you're telling me that this case about which of these assets are crypto securities, if this takes years, I'm optimistic that we're actually going to be able to get legislation passed in that time. If that is true, how would that impact the actual court case? Well, I'm hopeful as well.

Starting point is 00:20:49 I have to say that one of the things that struck me about today's hearing, David, was that it was serious. The Congress men and women asked probing questions. It's clear they've been giving serious thought to these very challenging issues. They seemed interested? Very interested. And here's the other thing. It was bipartisan. I thought the care that came from one side of the dais was matched by the care from the other.

Starting point is 00:21:14 and it's also clear from the chair's comments, Chair Thompson and Chair Patrick McHenry over in the House Financial Services, that they intend to move forward on this very, very quickly. So I'm very hopeful that we're going to see progress here as to how quickly and how much progress. Well, that's that still remains to be seen. And in the meantime, we're going to defend ourselves in court. We're very confident that any court looking at the issues raised in the SEC's complaint is going to reach the same conclusion as we have. The SEC is dead wrong. They've misapplied the law. and that these claims have no merit. Well, Paul, I think I can speak for the entire crypto industry when I say Coinbase has our support. And thank you for fighting the fight in court.

Starting point is 00:21:55 Give us the silver lining here. What's the light that you see at the end of the tunnel? What can we be excited about, even if this does take a very long amount of time? Well, I can understand why some listeners may be discouraged by these recent events. But if you just take a half a step back, you'll see that you've got now clarity emerging all over the world, regulators in London, in Singapore, in all kinds of countries, adopting serious, strict frameworks that impose real burdens on crypto developers and exchanges, but recognize that crypto is an important asset class and critically that crypto is here to stay. That's something I think we should be enthusiastic about.

Starting point is 00:22:37 Here in the United States, I think it's also important to be optimistic. excited that we have the Congress engaging with these issues in a very serious way, and at least based on today's hearing, in a very bipartisan way. That gives me cause for hope. But the biggest reason why I'm ultimately hopeful here, David, is that, you know, the crypto developers out there building interesting new networks and use cases and utilities, their work continues unabated. I don't think there's anything that happened today or in any of these recent matters that should discourage anyone from continuing to, you know, put in the hard work, develop great products and services, and continue to grow this amazing community. What can bankless listeners, what can people

Starting point is 00:23:17 sitting in their homes listening to this or watching this on YouTube? How can we help? How can we join the fight? So the number one thing you and your listeners can do is to make your voices heard. The folks in the Congress, the folks in the executive branch, they all understand one thing, which is what their voters tell them. And so raising one's voice appropriately, respectfully, but firmly, is very, very important. And that goes beyond just a retweet. That goes just beyond a like. We have started something at Coinbase called Crypto 435.

Starting point is 00:23:54 The 435 refers to the 435 congressional districts in this country. If you go to our Twitter handle, you'll see a pin tweet that lays out all the ways in which listeners can get involved. Crypto 435 teaches people how to connect with their elected officials. It speaks to all the ways in which to advocate for cryptos and sensible crypto regulation. This is an important opportunity and important time for everybody to get involved. Well, Paul, thank you so much for coming right out of DC into this live stream. I really, really appreciate it. We will put that pin tweet into the link in the show notes.

Starting point is 00:24:28 Paul, there is this promo video that Coinbase dropped today. So I'm going to say goodbye to you. and then we're going to play this video. So Bankless Nation, stick around. Paul, I really appreciate you. And thank you for fighting the powers that be for things that I deem to be authoritarian and top down and just not resembling crypto values. Thank you, David.

Starting point is 00:24:49 I appreciate it. Banklessation, you know the deal. Risk and Disclamers. Crypto is risky. Bitcoin is risky. Ether is risky. Trading illegal crypto securities is definitely risky. But sometimes you can't really help it.

Starting point is 00:24:59 You can lose what you put in, but we are headed west. This is the frontier. It's not for everyone. but we are glad you are with us on this bankless journey. Now, let's watch the video.

Bankless - SEC vs. Coinbase with Coinbase's Chief Legal Officer, Paul Grewal

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