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Coinbase Receives SEC Wells Notice for Crypto Products
Practical Law Legal Update w-038-9278 (Approx. 5 pages)
Coinbase Receives SEC Wells Notice for Crypto Products
by Practical Law Finance
| Published on 27 Mar 2023 • USA (National/Federal) |
The chief legal officer of Coinbase Global Inc. stated in a public blog post that the SEC has issued it a Wells notice regarding an undefined segment of its the digital assets it lists for trading in the Coinbase platform, as well as other crypto-related products. The SEC also issued an investor alert regarding general noncompliance of crypto-asset securities with US securities laws.
On March 22, 2023, the chief legal officer (CLO) of Coinbase Global Inc. published a public blog post in which he stated that the SEC has issued a Wells notice to Coinbase regarding:
- An undefined segment of the digital assets listed for trading on the Coinbase platform.
- Coinbase's staking service known as Coinbase Earn.
- Coinbase's integrated platform known as Coinbase Prime.
- Coinbase's custody wallet known as Coinbase Wallet.
On March 23, 2023, the SEC issued an investor alert warning that firms offering crypto-asset securities may not be compliant with US laws. It is not clear if the SEC intended a connection between this alert and the Coinbase Wells notice, as the alert does not mention any specific firms or platforms, and does not note any crypto assets that it believes are securities.
The Coinbase post states that Coinbase has met with the SEC "more than 30 times over nine months" but has not received any feedback on its proposals about SEC registration, and that the SEC ultimately did not respond to any of Coinbase's proposals. It further states that the SEC has not informed Coinbase of a specific concern about a single asset on its platform.
In the post, the CLO asserts that Coinbase welcomes a legal process to provide the clarity that it has been advocating for and to demonstrate that, in Coinbase's view, the SEC has not been fair or reasonable when it comes to engagement on digital assets. The post lists Coinbase's requests for SEC guidance, including:
- An amicus brief explaining the absence of SEC guidance for crypto companies filed on March 13, 2023.
- A petition for rulemaking filed with the SEC on July 21, 2022.
- A comment letter to the SEC filed on March 20, 2023 regarding the above petition for rulemaking.
In addition to the above, Coinbase proposed a regulatory framework on October 14, 2021 that received some praise from the market but appears to have been largely ignored by regulators (see Article, Overview of Proposed Coinbase US Crypto Regulatory Framework). The post goes on to opine that the crypto industry continues to receive conflicting statements from regulators rather than rulemaking and cites recent CFTC statements to support this assertion.
Coinbase asserts that it does not list securities or offer products to its customers that are securities, and its staking services are not considered securities under any legal standard, including the Howey test developed in S.E.C. v. W.J. Howey Co., 328 U.S. 293, 298 (1946) (see Practice Note, SEC Regulation of Digital Assets: FinHub Framework for Analyzing Offer and Sale of Digital Assets). The post further states that Coinbase Wallet is a technology, not an exchange, broker, or centralized platform.
According to the post, Coinbase products and services continue to operate as usual, and the news of the Wells notice does not require any changes to Coinbase's current products or services.
Coinbase received a prior Wells notice regarding a planned crypto lending program that has since been wound down, that resulted in the publication of a similar Coinbase public blog post on September 7, 2021 (see Legal Update, Updated: Chief Legal Officer Indicates Coinbase Has Received Wells Notice From SEC Regarding Crypto Lending Program).