What Brian Armstrong Said When Asked If Coinbase Lists Securities

Today the US securities watchdog has sued Coinbase for “operating as an unregistered securities exchange, broker, and clearing agency.”

As part of the complaint, the Securities and Exchange Commission alleges that multiple tokens on the Coinbase Global Inc. platform are unregistered securities. 

Coinbase’s CEO Brian Armstrong came on the Odd Lots podcast back in March, and the topic of whether or not it lists securities — and what might happen if the SEC were to come after it for doing just that —  was a major point of the discussion. 

In fact, a portion of the interview is cited in the SEC’s complaint, with regulators arguing that investors in Coinbase’s staking program “reasonably expect to profit” from it — one plank in the test of whether or not something constitutes a security or not.

In fact, there’s lots to pick out from the Odd Lots interview about how Armstrong and Coinbase were thinking about this legal risk. Armstrong said his company had asked for clear rules about what is and isn’t a security but that it hadn’t received anything like that.

And so instead, it developed its own points of legal analysis when deciding what to list and what not to list:

Tracy: 
… You guys say that you never actually list securities, but it feels like nowadays there's so much uncertainty over, you know, you could wake up tomorrow and the SEC says this is a security, or that's a security. I mean a little while ago, for instance, I think there was an enforcement action on Kim Kardashian for unlawfully touting a crypto security. So how can you say with confidence that you don't list any securities when it feels like that's a very fluid thing at the moment?

Brian: 
Yeah. So I think, look, the best thing for us and for the whole industry would be ‘Here's a clear rule book. Everybody has to follow it,’ you know, and if the rules change, give us a new rule book, we'll follow that one. We've actually been requesting that and we've filed a petition with the SEC on this. People can read it on their website. And we've sort of enumerated, look, these are the ways that the current securities laws don't really address some of these underlying questions in crypto. Like if there is no common enterprise or centralized entity behind this thing, who publishes the disclosures? So there's questions like that. Now, what we've done in the absence of that clarity, which again, would be the best case scenario, is that we have created our own internal process to review assets.

And we developed something, I think it has like 72 points in the legal analysis. And then kind of one area it looks at is securities law. It also looks at compliance risk, you know, cybersecurity risk, things like that. And we've evaluated probably roughly a thousand assets through this process. About 800 of them we have rejected and for various reasons, whether securities or compliance or cyber. About 200, 250 or something like that, we've decided to list. So, you know, I guess the heart of your question is what happens if the SEC comes out and says, okay. So if they come out and again, we're asking for more clear rules, so if they come out and say, ‘You know, we think this asset is a security,’ that's great. Okay, now we have clarity.

And assuming, you know, it's not, if it meets the legal definition it's not going too far, we would be happy to sort of update our process and our system based on that new information. Now, ultimately if they publish something and they say, ‘well, we think all these assets are securities’ then well, that's not really our understanding of the law and of the third parties and external council we've worked with. And so there is a line here where I think as an industry, and it's not just us, it's these asset issuers, which are even more primarily affected. You know, they would have to say, ‘okay, well let's let a court decide that’ because, you know, we have to follow a rule of law, so does the SEC, right? And so if they put out their opinion about something that doesn't necessarily mean it's true, the court ultimately has to be the decider on that.

As he notes at the end, a complaint from the SEC doesn’t make it a fact. And that the company was, as of March at least, prepared to let the courts be the ultimate arbiter of these questions.

As for specifics about how the company decided to accept or reject tokens, Armstrong suggested that if the teams behind them were engaged in “sketchy” tokenomics, or online hype to boost the price of the coin, then that could be the type of thing to make them wary.

Joe: 
But is there something in the, speaking in terms of patterns that you see within crypto projects that when you look at, the type of things that teams do that, you know, this token is not gonna be kosher for Coinbase. Are there things that you see in the industry where you think teams are crossing that line into, I don't know whether it's the common enterprise aspect, that preclude them from, at least in your judgment, from being safe to list?

Brian: 
Yeah. I mean, so I'll give you a security example, but there's others in cyber security and others. So if you're legitimately just trying to raise money for your company or for some project like an apartment complex or something like that, that is a security, that's the point of securities law. There has to be an investment of money in into this thing. And for a a common enterprise with an expectation of profit based on the effort of others. So that should exist, by the way. And we want that to exist in the world.

We've acquired a broker deal license. It's dormant right now. We'd like to activate it. We're working with the SEC to hopefully make that happen. Crypto is a technology that could make  crypto securities that could offer benefits, and update the financial system and improve all kinds of things like time to settlement and various things like that.

So that's an example. You know, if people are out there kind of really hyping these things like on YouTube and and the tokenomics look sketchy, and there's really low float and the insiders are selling, these are all bad fact patterns. And those are the things we try to avoid for consumer protection.

There's other other reasons we may reject assets too. I mean, another example would be cyber security risk. So we often will evaluate the smart contracts for, you know, is there some exploit in this or there's an ability, you know, if the asset issuer, not even like a malicious thing, but an accidental thing, if they lose the key, everyone's funds could be swept or something like that. That's not secure enough to meet our standards. So those are examples.

You can read the full transcript here.