Is Coinbase Disillusioned with Crypto?
Looking at some headlines and chatter on crypto Twitter, one might think that the largest publicly traded crypto exchange, Coinbase, now thinks Bitcoin is about as valuable as a Beanie Baby. And verily, good man, good woman or good person! It’s a settlement the exchange has made, in a formal legal document.
In a motion to dismiss the lawsuit filed by the US Securities and Exchange Commission (SEC), Coinbase appears to have “backed down” on its lifelong claim that crypto is the future of finance. The document was filed on August 4, 2023, but appears to have only recently garnered attention. Namely:
“On the Coinbase secondary market exchange and through Prime, there is no cash investment coupled with a promise of future delivery of anything. There is an asset sale. That’s all. It is similar to selling a property, the value of which may fluctuate after the sale. Or a condominium in a new development. Or an American Girl Doll, a Beanie Baby, or a baseball card.”
American Girl Doll? Undoubtedly, Coinbase missed the moment to capitalize on the Barbie boom.
But no, the exchange has not abandoned the crypto industry yet. Instead, the exchange fleshed out the argument that the country’s top securities regulator — the SEC, chaired by Gary Gensler — doesn’t have the authority to sue the California-based company because the assets Coinbase trades aren’t securities act.
In this case, the exchange specifically disputes the legality of its secondary trading service called Prime. I will not go into the history of securities law or how it should be applied to cryptocurrencies: I am not a lawyer and there is much more informed content to read on the subject given that securities law appears to be about cryptocurrencies Only thing still being discussed in crypto.
But I would like to say that Coinbase’s reasoning here, specifically regarding “transactions on Coinbase and through Prime”, is generally consistent with a recent court decision in the SEC v. Ripple Labs case, which found that most secondary market sales not “investment contacts” or a securities offering.
When you buy cryptocurrencies from Coinbase, you are only buying cryptocurrencies – no interest in the company’s equity or any claim to its Future income (one of the pillars of the excellent Howey test for determining such things). As with Barbie dolls, Beanie Babies, or even works of art, buyers may be hoping for an appreciation in the value of the asset, perhaps particularly through the later efforts or work of Mattel or a Picasso to improve their reputation.
Reasonable people can and do disagree. For example, conceptual artist and law professor Brian Frye argues that, in principle, any tangible asset could be considered collateral if the SEC so chose. He has urged the SEC to sue him by creating legal documents/works of art and selling them as NFTs that promise buyers more or less future profits.
And in many cases, treating cryptocurrencies as securities makes perfect sense. Especially when cryptocurrency issuers are doing just as much, like when a startup looking for working capital sells tokens to hedge funds or other “qualified investors” (cough cough, Ripple Labs).
By and large, that’s not what Coinbase does. It merely creates opportunities for interested buyers to acquire crypto. The realities and differences of assets like Bitcoin and XRP are significant when compared to traditional securities like stocks or bonds. The price of these assets often benefits from being listed on an exchange, but open and permissionless networks do not require them for these assets to proliferate.
Likewise, Coinbase doesn’t really need me to defend it. But for crypto skeptics, who are said to value transparency and truth more than anyone else, the claim that Coinbase is tipping over at the sight of the SEC is flat out wrong. (Finally! An answer to the age-old question, who’s watching the watchers?)
That doesn’t mean Coinbase is bug-free. Just weeks ago, the exchange’s public relations department had to set the record straight after CEO Brian Armstrog suggested the SEC should ask them to delist all cryptocurrencies except bitcoin, a widely circulated story that either points to a media error or a misguided attempt to distort a “narrative” was too real, too quick, and likely would have distorted the court’s opinion in its ongoing litigation.
It’s a company I’ve criticized in the past and will likely continue to criticize, in part because, like all crypto exchanges, it allows for some of the worst behavior in the crypto space that traders in the Play essentially zero-sum games in search of riches. I wouldn’t call Coinbase a bucket shop, but given how difficult it is to diversify revenue away from trading fees, it’s inseparable from “the Degens” — no matter how much Coinbase wants to talk about crypto’s transformational potential.
Almost every time someone profits from selling a cryptocurrency, it is at the expense of another person buying into the system has. This is precisely because these intangible assets are rarely related to the real world and often generate little social value. Many cryptos are created with a specific purpose but are used and therefore do not contribute to actually making the world a better place.
(There are borderline cases where dissidents and others in need benefit from the existence of a payment system that asks them no questions, which I think is reason enough for that. Also, I’m not convinced vain enough to believe that all cryptocurrencies are lethal, or that organic usage will not materialize.)
In a sense, this capital accumulation for capital accumulation’s sake is exactly why cryptocurrencies are not securities. It’s a rough representation of the value people see on the network, not on Coinbase or Binance where they are bought. The same goes for Beanie Babies, otherwise Toys R Us wouldn’t still exist?
Anyway, a few years ago I actually spoke to a trader who called the peak of the Beanie Baby bubble, aptly dubbed “Beanie Meanie,” and who said that the lack of adoption of crypto given which is not too surprising. He estimates that it takes “30 years to create a viable secondary market” for new products.
Does this time frame shorten if crypto is more useful than a doll? Or does that mean that even [rhymes with bitcoins] like “pepeyieldunibotsatoshidoge” will one day find a nostalgic or marginal buyer? Will grave-rolling former Supreme Court Justice William John Howey reemerge and become the ultimate “blockchainer complainant” in crypto? (I know it takes a bit of work to top ”Beanie Meanie”.)
Ultimately, you can hate crypto or Coinbase, but you can’t honestly say that Coinbase doesn’t believe in crypto. It would be utter madness to grapple with the technical and legal issues of introducing a Layer 2 if you only believed crypto was a toy gathering dust on the shelf.
