Bankless - Why Coinbase is Suing the SEC with Paul Grewal, Coinbase's Chief Legal Officer

Episode Date: April 28, 2023

Paul Grewal, Coinbase's Chief Legal Officer joins Ryan and David to discuss why Coinbase is Suing the SEC. Why did they choose to respond to the SEC's Wells Notice to Coinbase in the way they did? Is Gary playing 4D chess or is he just embarrassing and pushing U.S. crypto innovation outside of the U.S.?  Tune in to hear Paul's thoughts and much more.  ------ 📣 SAFE (Gnosis) | Non-Technical Hackathon Sign-up!! https://bankless.cc/AA  ------ BANKLESS SPONSOR TOOLS:  ⚖️ ARBITRUM | SCALING ETHEREUM https://bankless.cc/Arbitrum  🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2  🧠 AMBIRE | SMART CONTRACT WALLET https://bankless.cc/Ambire  👻 PHANTOM | FRIENDLY MULTICHAIN WALLET https://bankless.cc/phantom-waitlist  🦊METAMASK LEARN | HELPFUL WEB3 RESOURCE https://bankless.cc/MetaMask  ------ Timestamps: 0:00 Intro 5:44 Why Coinbase is Suing the SEC? 9:10 SEC Giving Crypto Community Rules? 13:14 Why Gary Thinks There's Clarity 15:22 Petition to Give Crypto Rules!  18:10 Why No Clarity Yet? 20:51 What Kind of Rules Do We Want? 23:44 Engaging with the SEC  26:40 Open Conversation?  34:48 Coinbase Wells Notice 42:11 Why is Gary so Confident?  45:28 Battle of Public Opinion  49:42 Does Crypto Regulation Have Hope?  52:45 Closing & Disclaimers  ------ Resources: Paul Grewal https://twitter.com/iampaulgrewal  Coinbase Suing SEC Blog Post https://www.coinbase.com/blog/coinbase-takes-another-formal-step-to-seek-regulatory-clarity-from-sec-for  Coinbase Wells Notice Video https://www.youtube.com/watch?v=zq2jf4sBdYE&t=576s  Gary's Clarity Video https://twitter.com/GaryGensler/status/1651624244445421591?s=20  ----- Not financial or tax advice. This channel is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This video is not tax advice. Talk to your accountant. Do your own research. Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. Additionally, the Bankless writers hold crypto assets. See our investment disclosures here: https://www.bankless.com/disclosures 

Bankless Nation, we have a special bonus episode for you today because guess what just happened. Coinbase announced they are suing the SEC. Yep, we could do that. Apparently, David, we've got the chief legal officer from Coinbase who's going to give us all of the details in the rundown. What's important about this episode? What are we doing today? Two big things. The big news that just dropped is that Coinbase has responded to the SEC Wells notice.

So that got, that information got released two hours ago. So we are going to talk to Paul, the chief legal officer of Coinbase, who was in that response. Not only was it a normal response where you draft up a legal letter and submit it to the SEC, which is what you normally do, it was also a video YouTube response. So we got influencer Gary and we got modern Coinbase and these two insurmountable forces are colliding and bankless is here for it. So that's the first thing. And then also, in addition to that, Coinbase is also suing the SEC.

And so we're going to talk about those details. What does it mean to sue the SEC? I didn't know you could do that. I totally did know you could do that. But like we talked about for the last two weeks, like, man, Gary really seems to be icorishing. Is this the final moment where Gary starts to turn over and decline? We don't know. But these are important moments in the history of this industry.

We have somebody in this industry who's finally standing up to Gary Gensler, to Gary the tyrant. And so we are going to just talk to Coinbase. as chief legal officer about the logistics. Like, what does that even mean to go toe to toe with the SEC? So that's the subject of today's show. Awesome, guys. And before we begin, got to let you know, a message from our friends and sponsors over at SAFE. They've got account abstraction and they've got a software development kit. That is an SDK that they have just released. And they have a hackathon coming up where anyone can join. David, give us a quick TLDR of the details here. We need more smart contract wallets in the world of crypto. And that's what,

core is it's an SDK package to build more account abstraction wallets out there. So we can have this wonderful, wonderful world, smart contract wallets. And of course, like Brian said, there is the hackathon, virtual hackathon to get that done. If you want to participate in your first hackathon, there's a link in the show notes to learn more. There we go. Guys, this story is developing in the moment. So this is some news that just launched today. And also I've noticed some tweets from Gary Gensler. Also, you know, putting his position out there that he's given, the SEC's given enough clarity to crypto. So this is definitely a to-to-do moment. And we'll be right back with the chief legal officer of Coinbase to talk about Coinbase suing the SEC and what this means.

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Today, we filed a narrow action in the U.S. Circuit Court to compel the SEC to respond yes or no to a rulemaking position we filed with them last July in 2022, asking them, to provide regulatory guidance for the crypto industry. And so here is what it was filed. This is the, and this is the petition. And so Paul, I got some questions. Well, what does this mean as a lawyer? Can you just kind of walk us through just the logistics of this?

Like, what is this? Yeah, thanks for having me on, guys. It's a pleasure to talk to you about this. So on Monday, what happened was that Coinbase filed what's called a petition for a writ of Mandate. And that's a fancy legal label for actually a rather simple request. What we asked the circuit court to do was to order the SEC to provide us with a simple yes or no answer to what we think is a simple yes or no question, which is will you issue rules for crypto? Last July, so almost nine months ago, give or take,

we filed a formal petition for rulemaking with the SEC. And in that petition, we asked, you know, something like 50 separate questions that we thought needed to be answered. in order for there to be a reasonable path for registration for cryptocurrency exchanges like Coinbase and simple rules that apply across the entire crypto economy. And unfortunately, the SEC, despite having many, many months to consider that petition, despite getting 1,700 comments from others interested in the issue, big companies, individuals, small companies, public interest organizations, you name it. The SEC has said nothing.

They haven't even given us a response. And so the law, fortunately, gives us a remedy in situations like this, which is to file a petition with the circuit court and to ask that circuit court to order the SEC to provide that answer. So that's what we've decided to do. Now, the standards of the law that apply to that kind of request are actually pretty straightforward. Congress has told all agencies, including the SEC, that you have to respond to these kinds of petitions within a reasonable period of time, which, of course, begs the question, what's reasonable? What's reasonable, yeah.

Yeah, right. Now, nine months delay is certainly in our minds unreasonable under any circumstances, but in these particular circumstances, it is particularly unreasonable. And the reason why is at the same time as the SEC has given us no response whatsoever to that simple question, they have made it abundantly clear in public statements and media interviews, even in testimony to Congress just recently, that they've made up their minds. And they know the answer to that question. The answer to that question is no. What they're doing is, on the one hand, declaring that no rules are required and that the SEC has all the authority that it needs as things currently stand on the one hand. And on the other hand, denying Coinbase and the 1700 or so commenters to our petition, a formal version of that same answer that would allow us to go into court and challenge the SEC's refusal. So we don't think that's permitted under the law. And although we never relished the opportunity to go to court against an important regulator like the SEC, we felt like we had no choice, not just for Coinbase, but for the entire industry. And so go to court is what we decided to do.

Well, we certainly, the crypto community, the crypto industry certainly appreciates you guys taking this on. I mean, like, if we could join this lawsuit, we certainly could. And we certainly can hear, let our voices be heard in various ways. And I think we'll have some calls to action for the bankless community, how to get involved. Let me ask you, though, high level. So you're just asking for some clarity on the rulemaking. One thing that's been very emphatic in the testimonies that Gary Gensler provided in front of Congress, as he said, the crypto industry already has the clarity.

We've been quite clear. In fact, Chair Gensler put out a video today specifying that he said this again. I'm not going to get the quote direct, but we'll include the link at the show notes. People can go watch that three or four minute video. He said, I'm paraphrasing here, that the crypto industry already has all of the clarity that it needs. The problem is not lack of clarity. The problem is lack of compliance, which is very interesting. Let me ask you just a high-level question here, Paul.

When was the last time the SEC actually gave the crypto industry some rules or some guidance or the types of things you're looking for? When was the last time they did this? Formal rules? Never. It's never happened. Not once has the SEC gone through a notice and comment rulemaking process that is set out under laws that were passed by Congress to give the cryptocurrency community any rules that would, for example, define what a security is as it applies to digital assets, that would define the appropriate market structures that would have to be in place for an exchange to register, that would define what disclosures, issuers would have to make. We've never seen those rules. And to claim now in 2003 that this is all, all clear and that every digital asset save Bitcoin and perhaps Eath, which by the way, the SEC chair seemed to struggle with in his recent testimony, is frankly disingenuous. And that's just not

Coinbase saying that, right? You can look in the words or look at the words of the SEC chair himself to understand how clear this is. Go back to when it was Professor Gensler, making very clear that 75% or more of the market was not even impacted by discussions of the how he test and the application of the Supreme Court standards to these topics. But if that's not good enough, if that was just an academic musing, as has been suggested by some, look at the words of the SEC chair himself when as chair in May of 2021, he literally smiled the following words. Here's what he said. He said, right now there is not a market regulator around these crypto exchanges. The next day, after he said those words to Congress, he said again that Congress needed to act

before the commission could because, quote, there is no federal authority to actually bring a regime to the crypto exchanges. So you don't have to take my word for it or the words of others who have raised concerns about this shifting position. You can look to the words of the SEC chair himself to understand that there is no market clarity. You have confusion as a result of the chair's own shift and change and dodge and positions. And of course, you have other market, you have other regulators as well at the federal level who have taken diametrically opposed positions from the chair at the same time. Chair Benham, for example, the chair of the CFTC, has said that ETH is a commodity subject to his jurisdiction. You've had the DOJ,

the Department of Justice, saying in a prosecution of a former employee of ours for insider trading that wire fraud, not securities fraud, but plain old garden variety wire fraud is the appropriate charge given the nature of the assets at issue. So it's just not palatable or plausible that somehow all of this has been resolved, all this is clear, and that, you know, companies like Coinbase and others just need to come in and register when there's simply no way to do that. So Paul, how does Chair Gensler get away from saying this over and over and over? again. Is there any possible explanation for why he keeps saying there already is clarity? For example, one thing he repeats often is the prongs of the Howie test, right? I haven't heard him be more

specific than that, but is there any possible rationalization or justification for why he keeps re-articulating that there already is clarity? Is there anything you can give him? Do we have any clarity coming into the SEC? Well, let's be clear, even in articulating the four factors, there's often an omission of a key predicate to those four factors, which is that you have to wait for it in order for there to be an investment contract, a contract or a transaction or a scheme that then involves an investment of money in a common enterprise and so on and so forth. So that predicate is critical. It's everything. And every time that that test is articulated by the SEC, they conveniently omit that predicate in a way that obviously sweeps in many more assets

than when otherwise qualify. You know, guys, let me be very clear. I agree completely that there are digital assets out there that are securities. In fact, a number of them, maybe even many of them. We don't list them on our exchange. We'd like to be able to. I'd love to be able to offer digital asset securities in the United States, but we can't do that under the current law. And so the Supreme Court tests are the law, and we are happy to have that discussion and debate whether or not they apply to any particular assets. But they're not clear. The SEC is not being clear, certainly, as to how it would apply those factors to the vast

majority of assets. And more importantly, more importantly, it is absolutely clear that the SEC has shifted its position. It's changed its mind. It's flip-flopped. Pick whatever way you want to frame this from where it was just a short while ago to where it is today. I'm not making up these words from the SEC chairman. I'm literally quoting them, just as we've quoted them literally in our brief to the Third Circuit.

Paul, going back to this petition, the petition is to compel the SEC to answer yes or no to a yes or no question. And that question is, are you going to provide rules for the crypto industry? And it's not saying, are you going to provide these rules or those rules or a list of rules, correct? It's just saying, hey, can you tell us if you're going to provide rules, generally speaking, correct? My understanding is correct, yeah? You've got it exactly right. And look, David, the answer to that question, as we all know, is in fact, no, they are not going to give us rules. But they're not saying that.

And they're not saying that. And the impact of that is very specific. The impact of that is we can't on behalf of not just Coinbase, but the entire community of commenters and the entire industry, take that rejection or denial and then go to court to challenge it. So what we're saying in our petition that we filed on Monday is just give us the answer. We respect you. We understand we may have a difference of opinion. This is not personal, but let's not play games with the jurisdiction of the federal courts. Let's have a full and fair and honest fight about this.

And if we're wrong, ultimately, we will respect the decisions of the federal courts. the courts, we always do. But you can't play games, we don't think, in order to deny that discussion, that debate, that litigation, even taking place. Right. So the claim here is that the SEC is operating in this like ambiguity gray area, which benefits them. And so like what Coinbase is trying to say is trying to get the SEC to respond yes or no, because the SEC wants to live in that gray area. And so what is really is going on here is Coinbase is Coinbase is is trying to get to call the SEC's bluff, if you will, understanding that they can't say yes or no because they don't want to say yes or no. And that's really the crux of this issue here, correct?

Well, let's be clear. They can't say yes because if they were to say yes, that would be to admit that rules were necessary and that would fly in the face of everything that the SEC has now been saying for several months. They can't say no because once we get a no, we have a right to go to court and say that you got it wrong, that rules are, in fact, required under the administrative procedure. So they're trying to avoid that reckoning however they can. And again, I can understand, you know, tactically why this is the approach that they've taken, but the law doesn't allow it. And, you know, again, we don't, we don't, I don't relish and Coinbase doesn't relish that, you know, the need to go to court. I'd rather be doing other things. I'd rather be coming on bankless and talking

about new product launches and new services and new opportunities that we're pursuing. But the SEC has left us with no choice. They created this situation. We're just left with no choice, but to go to court to try to address it. David, one thing you said that I want to check with Paul here is it's not immediately clear to me. You said that there's maybe some perceived benefit for the SEC to kind of live in the gray and not give clear answers on this. Why? Why is that a benefit? it. The SEC's mission is to have capital markets guard capital market formation. Stated mission. State admission. Stated mission to help retail in the midst year. I could go through kind of the full

mission in a minute, but you probably know it as well. Why would they want to not provide clarity to crypto. Is there an unstated mission here that we're all suspecting them on? Well, it may be an unstated mission, but it almost certainly is an illegitimate mission. Look, the fact is that all government agencies have to operate within the four corners of the authority that has been granted to them by Congress. Congress gets to decide what their authority is. Congress gets to set the rules by which they operate. They don't get to do that. They have to operate within those constraints. And that's not just for the SEC.

That's true for every agency. And I have a lot of respect for the federal government and its work. And almost every agency honors and respects that. But in this particular case, the four corners of authority that have been granted to the SEC are much more limited, are much more defined than perhaps the current commission and the current chair would like. The fact of the matter is that under the federal securities laws, the SEC only has, jurisdiction as to securities, surprise, given their name, and security has been defined. Yes, very broadly, the chair likes to point to Supreme Court precedents and others, which makes clear they have broad authority. But broad authority guys doesn't mean unlimited authority,

at least the last time I checked our constitution. They are operating within constraints. And in this particular case, the key constraint is that Congress requires that the SEC established that these assets are investment contracts. That's a very specific term with a very specific meaning under the law. And so why would they insist upon this ambiguity as your question asked? Well, it allows them to exercise influence and authority over parts of the market, types of technologies that Congress doesn't authorize them to do. It allows them to extend their influence and expand their jurisdiction where the law says they can't. That's what's going on here? So a power grab is perhaps what this might be, although we're not sure what all of the

motives and incentives might be. Let me ask you this, Paul, what types of rules are we looking for? So obviously, we want to know which things are securities and which things are commodities. Ether is the biggest example of this, right? We heard Patrick McHenry grilling Gary Gensler and asking the question, repeated fashion, is ether a security or a commodity? and Chair Gensler sort of dodging that question, giving a non-answer. This went on and on and on in the congressional hearings that happened a couple weeks back. That's certainly one of them, at least the second largest asset in crypto, can we call, I mean, it's been seven years.

Can we understand what that is in the U.S.? So that seems very easy to understand. What other rules do, does the crypto industry need clarity on? So in our July 22 petition, we asked something like 50, separate questions that we think need to be answered in order for to be a comprehensive and fully functioning regulatory framework for crypto. You're absolutely right that what is or is not a security is certainly an important question. It should not be a question that the three of us or any of your listeners should have to guess at over and over again. Even as to ETH, as you point out,

we now have no clarity as confirmed by the chair's testimony last week on that very simple question. But there are other questions that matter too. For example, what disclosures should issuers have to make in order to give investors the information they need in order to make good investment decisions? There's a whole host of requirements that we think could and should apply to digital assets. Digital assets have unique properties. They have unique economics that are also, we think, relevant to material to an investor making a sound decision.

That needs to be laid out. There are all sorts of questions about market structure. For example, blockchains, as you and your audience know very well, do operate in very different ways than traditional assets. The need, for example, for all sorts of complex, expensive, and time-consuming intermediaries to settle trades largely goes away with digital assets. And so a lot of the structures that are in place for traditional assets just don't make sense when it comes to crypto. All it does is add cost and expense to each trade or each, each price. each activity that consumers want to engage in. So we think there are a whole host of topics that could and should be answered.

And we're happy to start with whatever part of that list or anybody else's list that the SEC would like. But unfortunately, today, I can't even tell you what the SEC's views are any of those questions. Heck, I can't even tell you if we're even going to get an answer to our petition because they've simply refused to engage. Paul, Gary Gensler keeps inviting people in the crypto industry. to his office, right?

And this series is called Office Hours with Gary, which is kind of an educational campaign. And he keeps saying, come in and register, come in and talk to us. And the projection to the world from the SEC and Chair Gensler is that there's an open door for communication. And crypto is being noncompliant, but if you'd only come in and actually talk to the regulators, talk to the SEC, talk to Chair Gensler, then we could smooth everything over. Has that been your working experience? Can you describe that?

because most of us don't see that side of things. I mean, what have you tried to do to engage with the SEC in the past? So, Ryan, even as we've been very public in calling for rules for crypto and a notice and comment rulemaking process that would allow everyone to participate, not just coinbase or a few favored parties, but anybody with an interest in the topic, we have engaged in private conversations going back to last September with the SEC in an attempt to lay out our ideas for what a registration framework might look like, what a pathway to registration for exchanges like us might involve. And over the course of those 30 or more separate engagements that we've had with

them, 30 or more, we have laid out everything we think about all these topics that we were just discussing, and we have been waiting patiently for any response by the commission, any feedback, or any counterproposal that they wish to make. When we find, finally got to the point where it was, frankly, we'd run out of things to say because after 30 engagements or more, you start to run out of room. It was time for the SEC at that point to provide its position, its response. And the only response we got at that point in time was the following. Thank you very much. We appreciate your time. Have a nice day. And a few days later or a short while later, a well's notice. That's not come in and register. That's not a dialogue.

that's a monologue that ultimately, I'm not kidding you, that's how it has played out. And so the notion that has been suggested that all you got to do, guys, is go to the website, download a form, come into compliance is laughable. And frankly, it's insulting to the hundreds, thousands, tens of thousands, millions of people who are interested in this issue working on these topics. guys, 20% of Americans have now bought or sold crypto or otherwise engaged with crypto assets. You have tens of millions of Americans saying, we want this. We want this to help solve some of the inequities in our traditional financial system.

And what are they being told? Oh, just go to the website. Download a form. It's no problem. We all know that's not possible. We all know that's false. Paul, describing these. It's cute, cuddly accepting Gary in the front and then tyrant, close-minded Gary, SEC in the back.

Paul, these discussions between the SEC and Coinbase in the past, have they been like face to face? I mean, part of me is just like, guys, can we just all get in a room, sit across a table, human to human, just talk to each other. I mean, it's not that hard. The crypto industry, Coinbase included all of us, we don't want the FTXs of the world. We don't want the doquins and lunas and terrors. We don't want the Celsius and Alex Machinsky's. It makes all of us look bad. We hate it.

We want it out of our industry. So why can't our regulators kind of partner with us? Why can't we just have a heart-to-heart discussion where we say, you've got some goals, we've got some goals, here are the things that we share in terms of goals. Let's work on those together. I mean, has that been tried? Because the naive Ryan wants to say, like, hey, I mean, they're all people. We're all trying to do the right thing.

Maybe there's a miscommunication here. Maybe, you know, we should stop texting, you know, and like emailing and actually get in person and meet? Has this been tried too, Paul? Let me say a few things about all that. First, yes, of course we've had face-to-face conversations as part of this engagement, including meeting in person. And I want to be very clear about one thing because I fear sometimes in the passion of our disagreements, there's a misunderstanding or misapprehension of the dynamics in those conversations. The tone is cordial. The tone is professional. By and large, I have a ton of respect for the hard work and the commitment of the staff at the SEC who are trying to do the right thing, who want to get to a reasonable place.

But they operate under the direction and control of the political leadership of that agency. That's just the way it is. That's the way that the law has set things up. And so as good-hearted and as much as they act in good faith at the staff level, if the political leadership wants to take things in a different direction, leadership has the final say. The other thing I will say is, I fear sometimes when we talk about regulators, we narrowly focus on the SEC alone. And obviously, the SEC is super important to our industry. But there are a whole host of other regulators at the federal level here in the U.S., even at the state level, and of course, lots of regulators around the world where the conversation,

the tone, frankly, the productive nature of the discussions is entirely different, right? So, for example, I have a ton of respect and we've seen great work coming out of the CFTC. And that's, I think, been, you know, well discussed in our community. But the Department of Justice, no softy, by the way. Normally, you know, you don't look at federal prosecutors and say, oh, gosh, how reasonable. At least some people don't. I happen to have had very good working relationships with many prosecutors over many years. They're not cuddly, though.

They're not cuddly. And we don't want them to be cuddly. I'm a former federal magistrate judge. I don't want the U.S. DOJ, assisting U.S. attorneys to be warm and cuddly. They're there to do hard work and to deal with tough issues. All that said, when they've looked at issues impacting Coinbase and impacting crypto, they've applied sound legal analysis, a certain flexibility and a commitment to getting it right. I have a lot of respect for that. The same is true even within Department of Treasury. We've talked in the past about FinCEN and their responsibilities for overseeing the AML laws, of our country and executing our very important sanctions programs. These are tough, serious people. They do not give people a break where they don't deserve it. But they're reasonable.

They're committed. They're good public servants. So just within the United States, we've seen very different approaches by other regulators. I don't think it's fair to paint all of them with the same broad brush. And that, of course, doesn't even begin to address all the regulators outside the United States where in places like the UK, U.K., Europe, Singapore, Australia, you name it. Again, you've got tough, serious people who will hold you accountable if you cross a certain line.

But they also understand that in order for us to move forward as a society for us to address some of the inequities in our financial system, we have to nurture this industry even as we hold it accountable. That's the part that's missing in one part of our federal government right now. Well, speaking of people who have tough jobs, Coinbase, of course, has got to be one of those people because they are, you're not. guys you guys are taking this fight to the to where it needs to go and this is actually only one half of the story that that we've talked about so far the other half is the news that just dropped a few hours ago which is coinbase's response to the SEC's wells notice uh which was a new strategy out of coin base did it in a video and so there's there's this conversation that we need to to have paul but then there's also just like the meta conversation of this like this is there's no

bigger fight than this one like if like other people who the SEC has gone after have settled, they've passed on, and like the SEC has moved on. There's no bigger fight than this one. So this is the, this is, you know, this is the grand finale, right? And so I want to just ask you about just like how far is Coinbase willing to take this and what is that sort of calculus? But first, before we get to that part of the conversation, we have to talk about some of these fantastic sponsors that make this show possible, especially Metamask, our strategic wallet for 2023, go click on Metamask. Cheers. Learning about crypto is hard. Until now, Introducing Metamask Learn, an open educational platform about crypto, Web3, self-custity, wallet management,

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or fishing websites. Phantom has already saved over 20,000 users from getting scam, or hacked. So get on the Phantom waitlist and be one of the first to access the multi-chain beta. There's a link in the show notes or you can go to phantom.com slash waitlist to get access in late February. Bankless station, we are back and the recent news that just dropped Coinbase responding to the SEC's Wells notice, not only with an official legal document that looks like a legal document, but also with this YouTube video that's on screen. Not watching it, we'll put a link in the show notes

so you can go watch it yourself. It is both a 14-minute video and a four-minute short shorter video that summarizes it, both with Brian, the CEO of Coinbase, and also Paul here. Once again, we're having him twice on the screen. And so we'll just need to start at the very beginning, Paul. What's a Wells notice and why does Coinbase need to respond to it? Yeah. So a Wells notice is just essentially a formal notification by the SEC that the staff has concluded, preliminarily, that you as a company or you as an individual have violated one or more.

of the federal securities laws. And so by giving you that notice, they also give you the opportunity to submit a brief, and in our case, a brief and a video, to give our side of the situation and to attempt to persuade either the staff in the first instance or the commissioners themselves, who will review a recommendation tendered by the staff, that it doesn't make sense to proceed with the case or that the case, as currently framed, ought to be changed or narrowed in some way. that's essentially the Wells process generally and that's the Wells process that we are we are going through as we speak do they tell you in the Wells notice yeah what what did they tell you what they're suing you for like what the deal is not quite soon well what is the term for it enforcing right yeah well and enforcement ultimately

translates translates or turns into suing so they're effectively one of the same thing but the notice itself is not a formal charge the formal charge will come one once the commissioners vote to approve what's been recommended and a complaint is filed in federal district court. You know, as to our well's notice, look, it was very generic. It was very vague. It essentially rattled off a general description of our business and said you're violating the federal securities laws.

I'm not just- So it could have been more precise. And it absolutely could have been more precise. Of course. Of course. Of course. They hold the pen on that. And because I was concerned and Coinbase was concerned that somehow,

we might be accused of mischaracterizing what the Wells notice said or how detailed it was, I made a somewhat unconventional decision. I'll accept that to share the notice with the world so that people can reach their own conclusions. And if they think I got it wrong, they're free to say that. But I think if you read that notice, as I shared, you'll agree that it doesn't really say very much. It certainly doesn't identify any particular products or services in the form of tokens or assets that are specifically violating the securities laws. And that's made it even more challenging than otherwise has been for us to provide an adequate response. But we've attempted to do our best and respond to the charges as they were presented. Right. So this is on brand for this particular

administration of the SEC to do this stuff without much further clarity. So giving Coinbase a Wells notice saying, hey, we're going to sue you. And then going to further to discreet, coin basis business model saying this is why we're going to sue you, which from the Coinbase perspective does absolutely nothing. It's like, yes, thank you, SEC. That is our business. We still don't know why you're suing us. And so you guys presented this, this response. And the response was basically the SEC allowed us to go public as a public company. And we haven't changed the business model since you originally allowed us to do that. So first you approved us and now you're giving us a Wells notice and this Wells notice is sufficiently

ambiguous that we still don't know why you gave us. And so like we could go like zero in on the details and talk about how like like crazy this is, which we've already we've done that. That was the first half of this podcast. But I just want to zoom back out. It's like the SEC, Gary is seemingly intent on picking a fight. And Coinbase is here ready to stand up to that. And so my question to you, Paul, is like, can you just like walk us through some of the calculus here? Like we got we got the chief legal officer of Coinbase. We got Gary who's, I can't remember if he's a lawyer, but he's lawyerly minded, not a word. But like, so what's the calculus here from a lawyer's perspective?

Well, to be clear, he's not a lawyer. He's very smart. He's very capable. He's among the most talented public servants we have. I want to be very clear about all those things because sometimes people dismiss the chair because he doesn't have a lot of degree. suggests that he just doesn't understand how these markets work. He knows exactly how they work. He has studied the law scrupulously. And so I think we just need to understand we're dealing with a very capable individual and a very capable commission as a whole. Look, how does this calculus work from

our perspective? I have to say one thing as a preliminary matter, you know, when you get pulled over for speeding because you're doing 35 and a 25 or whatever the case may be and you're at risk of having to pay a $50 or $100 fine. Even in those circumstances, guys, you get a ticket. And what does the ticket tell you? It tells you the date. It tells you the time of the alleged offense. It tells you what make model and license plate number is being accused of violating the posted speed limit. It provides the officer's name. It provides other details which corroborate the charge in a way that gives you fair notice of what's going on. How on earth do we get to a situation or a place where doing 35 and a 25 gets that level of detail in terms of charging someone with violating

a rule or a law. But the Wells noticed that Coinbase received in this trillion plus dollar industry as the only publicly listed company in the United States in crypto. And it doesn't even tell us, for example, these are the tokens that violate one or more of the federal securities laws. Here are the products and services specifically that you offer that we believe qualify as a security and therefore come within our jurisdiction. And yet that's exactly where we are. So against that backdrop, how are we thinking about this? I'll say it again. I'll keep saying it because

it is absolutely true. We don't relish going to the going to court with an important regulator like the SEC. But in a situation like this one where Congress has yet to pass legislation that reigns in this overreach by the regulator, where the regulator has made. clear they have no interest in issuing rules and no real interest in engaging on what a reasonable path to registration might look like. What are the choice do we have but to go to court to get that same clarity? And again, it's not just clarity for Coinbase. We're very blessed to have ample resources. I'll put it that way to defend ourselves. This is about getting clarity for the industry because make no mistake if the SEC is able to operate in this fashion,

vis-a-vis Coinbase, who's off limits, right? Right. Who is safe from this kind of regulatory overreach? So from our perspective, it's not so much, do we have a choice as to whether or not to fight or not? From our perspective, it's what are the choice do we have? Right. Yeah.

And we're thankful as an industry that Coinbase is choosing to fight this fight. And from our perspective, and this is what's confusing to me, Paul. From our perspective, we made this claim when Ryan and I on one of the bankless shows, when the SEC served the Wells notice, that we claim this is like the Icarus moment of this current, this current regulatory body from this current administration. They're going after Coinbase, which has been pro-compliance, low cooperation with the regulators from day one. That's been the schick of Coinbase is working together.

and been squeaky clean and working within the limits. And Gary and the SEC has done their ambiguity, they're flip-flopping. To me, it's just like, to me and Ryan, and most of the industry just seems obvious that the SEC is going to lose. They're going to, they're like, it's not on their side. But like you said, Gary is really, really smart.

And so he knows the game. He knows the battle. So I'm just confused as to what makes Gary and the SEC so confident. Like, why are they so confident that they can do this? And I'm just so confused about that part. Let me speak to that. Just because someone's really, really smart doesn't mean they're really, really right or even right at all. Right.

And so in this situation, look, I can't speculate as to sort of anyone's motives or their inner thinking about, bringing a case like this against a company like Coinbase. But I can say, though, is that it is remarkable to me that we find ourselves in this place and in this situation with a Wells notice and a threat of litigation when, as you point out, we have operated not just in plain sight, but banging on the SEC's door for more clarity and for more rules for years. And it is also remarkable, I have to add, that Coinbase has received this a well's notice with this record.

While, to my knowledge, even as the SEC was talking to Sam Bankman-Fried and F-T-X for many months, I don't know how far back it went. Did they ever receive a Wells notice before they collapsed? No, they did not. At least not one that's been disclosed publicly in the way that we've shared and we've been transparent about. How on earth does this make sense? And I have to also observe, guys, that, you know, as we're.

we're fooling around with this here in the United States and making a mockery of the rule of law, the rest of the world is watching. They're watching very carefully. In the UK, in Germany, in Singapore, and Australia, you name it. Regulators are looking at the situation in the U.S. and I'll put it charitably, they're laughing at us. And they're doing more than just laughing at us. They're seeing an opportunity to grab the mantle of leadership away from the United States. And that's exactly what they're doing when they pass very tough, very challenging rules like Mika in Europe and similar frameworks elsewhere in the world. That's what they're doing. And we are sadly allowing that to happen. That's the part that I can't understand more than anything else.

Paul, you mentioned earlier that it was unconventional for you to go out publicly with the Wells notice. Also, maybe unconventional to release the response to this in a YouTube video. And notice the way the video starts, partially as Brian tells his story as kind of an entrepreneur with just an idea back in 2012 and having kind of no money, a little bit of funding, and growing a company to a publicly traded company in size and making the decision to do this in the United States, where it was unclear what the posture of the U.S. government would actually be. And he made that decision.

And I can't help but notice that this seems to be. you mentioned earlier, 20% of Americans actually own crypto. This seems to be somewhat of a battle of hearts and minds. And I also think maybe Gary Gensler and members of the SEC know this as well because he is releasing what we've called affectionately on bankless, influencer videos about kind of office hours in Gary and what his posture is. So it almost seems like there is a whole PR angle to this or a whole narrative battle, battle for hearts and minds,

I might say for this. And I want to ask you to what extent do you think this is actually a battle for public opinion? And if it is a battle for public opinion, is that persuasive enough? Like what can we do to kind of help? Well, it is in large part a battle for the hearts and minds of this country.

Look, if anyone has any doubt about how the chair has thought about this issue, go back and watch the MIT lecture series. If you do that, you'll see in one particular lecture, Professor Gensler is explicit about how he thinks about establishing jurisdiction and authority as a regulator. He talks about beginning with the message. And I'm paraphrasing here, but that is almost exactly what he says. He begins with the message and then he moves from the message to the policy. And that's what's happening here. And notice what's missing in that little sequence. the actual law, right? The law that Congress passed that gives the SEC or any other agency, whatever authority it might have. And so, yes, I do think there is a battle for hearts and minds.

And it can be amusing at the very least and may be frustrating to see this campaign waged by the SEC on Twitter and elsewhere when there are serious rulemaking to be done and no response has yet been tendered to a very simple yes or no question that we and others have posed. But look, we can either be frustrated or amused by that or we can do something about it. And so, you know, we have to accept that we are in that battle as an industry, not just Coinbase, but everyone in crypto is in that battle. So we all have to get involved. It's one of the reasons, guys, why we started recently and announced the formation of something called Crypto 435, and the 435 refers to the 435 congressional districts in the United States. It's a way for

regular people, people who don't pay attention to crypto day in and day out like some of us do, but who care about having choice in their financial system and want to make their voice heard and want to register their concerns about how the SEC and perhaps others are going about this. If you go to our Twitter handle, you'll see that we've got a pin tweet that talks about how regular people can get involved with crypto 435. You can sign up. You can add a shield to your Twitter handle and you can be directed to a site that provides more information on how to get involved. We think it's very important that whether you agree with Coinbase or not.

And we hope you do agree. But even if you don't, people need to register their concerns and lend their voices to this debate. Because if they don't, the only voices are going to be heard in this debate are those of individuals and entities that are very hostile to crypto, very hostile to any change to the current system and who are perfectly content to see the traditional financial system persist in this country for another 50 or 100 years and all the innovation move offshore. That's what's at stake here. Paul, there's certainly a lot at stake. And we appreciate you spending some time with the

bankless community to talk about all of these things. I guess, you know, lastly and in closing, it feels very much like 2023 has been a low point for our relationship with crypto's relationship with regulators and maybe the U.S. government as a whole, you understand some of this might be coming out of the 22-22 backlash when there were more frauds and scams. So understand some scrutiny there. But at the same time, it seems like the people who have always been doing the right thing and who have the same kind of end goals as regulators are being held under scrutiny. And I want to ask you if you think this gets worse before it gets better, if you have a... any hope that the U.S. actually comes through this period of time and comes out the other side

with a sensible crypto policy that keeps crypto innovation forefront and doesn't leave the U.S. behind? Or if you think it's going to be really rough and it could go either way, what hopes do you have about the future here? Well, I want to be very clear that even if in the short and perhaps medium term, things will continue to be difficult in terms of the regulatory environment in this country. I am extremely hopeful about the long term for crypto. And the reason why I'm extremely hopeful is that if you look at the level of talent that's not just staying in crypto, but coming to crypto, even in this environment, if you look at the investment capital, if you just look at the overall creativity that we're seeing day in and day out across crypto, I mean, the future is

bright. And here's the thing. That future is going to happen. Now, as an American, I want to see that future happen here in this country as much as any other, but it's going to happen. And so we as a country have a choice to make. Do we want to push this innovation overseas and miss out on a once-in-a-generation opportunity to shake up and change the financial system for the better? Or alternatively, do we want to say, let's have a conversation? As you said, let's sit down as fellow citizens. face to face and talk through our differences and come to some reasonable accommodation that will balance legitimate concerns that the SEC has and others have. I want to be very clear.

They have an important mission. We should all support that legitimate mission, but that also protects innovation and nurtures entrepreneurship so that we can continue to lead among nations. I think that that's what gives me as much hope as anything, is that if we can just work through the challenges of this current environment, the future remains very, very very bright and I remain very, very optimistic. Well, that's great. So are me.

So are we. I think we're seeing some glimmers of hope, even Congress. We do have some friends in D.C. Now there's a growing coalition who's willing to fight for these crypto freedoms. And thank you and Coinbase for being a part of that as well. Paul, we appreciate this. Thanks, guys. I really appreciate your time and really appreciate the support you've lent to what we're

trying to accomplish. Risk and disclaimers, Bankless Nation. We'll include some links in the show notes where you can kind of get involved in this mission and add the shield to your Twitter profile. And got to let you know, risk and disclaimers, of course. None of this has been financial advice. It's not legal or regulatory advice either, of course. Crypto is risky.

You could lose what you put in, but we are headed west. You can get sued by the SEC? That's true. This is the frontier. It's not for everyone. But we're glad you're with us on the bankless journey. Thanks a lot.