The Securities and Exchange Commission sued Coinbase on Tuesday morning, alleging the cryptocurrency company “made billions of dollars unlawfully facilitating the buying and selling of crypto asset securities.”
“While Coinbase’s calculated decisions may have allowed it to earn billions, it’s done so at the expense of investors by depriving them of the protections to which they are entitled. Today’s action seeks to hold Coinbase accountable for its choices,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a written statement.
Coinbase, the largest U.S.-based crypto exchange, has been at the forefront of lobbying to shape new rules and regulations on the cryptocurrency industry. The company spent $700,000 on lobbying during the first three months of 2023, more money on federal lobbying than any other industry player through the same period.
Cryptocurrency industry players spent more than $6 million on federal lobbying in the first quarter of 2023, putting the industry on track for another record year. The cryptocurrency industry vastly expanded its political influence web with federal lobbying spending exploding to a whopping $21.6 million in 2022, OpenSecrets previously reported, with Coinbase accounting for $3.4 million of that total.
Paul Grewal, chief legal officer for Coinbase, appeared Tuesday before the House Agriculture Committee alongside federal regulators and Robinhood’s legal compliance chief to explain “why we need a clear rulebook for crypto.” He weighed in on draft digital asset regulations proposed by House Agriculture Committee Chair Glenn Thompson (R-Pa.) and House Financial Services Chair Patrick McHenry (R-N.C.) last Friday a “strong step forward in providing overdue regulatory clarity.”
“Although legislation can always be improved around the edges, the Discussion Draft would create a workable foundation for customers, investors, and market participants alike. We urge Congress to act on it as soon as possible,” Grewal’s written testimony concluded.
In his opening statement, Grewal directly addressed the SEC lawsuit filed hours before the hearing, saying it was “disappointing but not surprising” that the SEC sued Coinbase “today, the day of our testimony before this committee’s critical hearing on creating a workable framework for digital asset regulation.”
The Coinbase lawsuit comes one day after the SEC sued Binance, the world’s largest cryptocurrency trading platform, and its CEO Changpeng “CZ” Zhao for U.S. securities violations. In a 136-page complaint, the SEC alleges Binance was operating an illegal trading platform and misusing customer funds.
“Through thirteen charges, we allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law,” said SEC Chair Gary Gensler in a written statement.
Binance denied the SEC’s allegations, saying the company was “disheartened” by the Wall Street regulator’s decision to sue after both sides had been engaged in settlement discussions.
An OpenSecrets analysis of federal lobbying disclosures found Binance paid four lobbying firms a total of $430,000 during the first quarter of 2023, more money than the company has spent on federal lobbying in a single quarter since registering to lobby in the third quarter of 2021. Lobbyists reported lobbying on crypto regulations, compliance policies and general industry business.
Only two of the 17 lobbyists working for Binance in the first quarter of 2023 had not previously worked in the federal government. Binance’s roster of 15 so-called “revolving door” lobbyists that previously worked in the public sector includes the former senior counsel to the House Financial Services Committee and former chief of staff to now-Senate Minority Leader Mitch McConnell (R-Ky.).
The McHenry-Thompson draft bill establishes uniform definitions for industry regulation, carves out exceptions for certain types of digital assets, offers a roadmap for digital assets that begin as securities and expands the Commodity Futures Trading Commission’s registration, oversight and enforcement authority over digital assets, among other provisions. It also directs the SEC and the Commodity Futures Trading Commission to study a range of questions related to decentralized finance, including the extent to which decentralized finance has integrated into traditional financial markets and the risks associated with that.
“It is no secret blockchain technology and digital assets hold real promise. From improving our banking and financial services to providing data privacy and improving supply chain logistics, these technologies have the potential to transform everyday lives for Americans,” Thompson said in his opening statement.
“As we look to put up clear guardrails for digital assets, it is important that consumers and market participants benefit from the same market protections found in traditional financial markets.”
Thompson made it clear that the legislation he and McHenry put out was a draft that they intend to update following debate, technical assistance and stakeholder feedback.
Ryan Selkis, founder and CEO of the crypto research firm Messari, called the discussion draft “the most extensive piece of legislative text that we’ve seen on financial services maybe since Dodd-Frank” in a Twitter Space discussion he moderated on Monday.
Selkis pledged to raise at least $100 million for a political action committee, Barron’s reported recently, which he said will be used to promote crypto and attack the industry’s critics. As of the end of the first quarter of 2023, Messari has not spent any money on federal lobbying.
Blockchain Association CEO Kristin Smith was also part of the Twitter Space discussion. The crypto industry must “get our heads around where our biggest pain points are” in the bill, Smith said, ideally within the next month since there is a “very good” chance the discussion draft could go to markup — when legislation is opened to amendments and committee votes on the bill — in July.
“It is incredibly important that the industry and the crypto community take this legislation very seriously. The fact that we have the chairs of the two committees of jurisdiction working together is something we haven’t seen before,” Smith said.
The discussion draft was proposed by two Republicans, and it does not yet have bipartisan support. Of the dozens of crypto and blockchain bills introduced by members of Congress over the last year, OpenSecrets data shows lobbyists for the cryptocurrency industry overwhelmingly reported lobbying on two bipartisan bills: the Lummis-Gillibrand Responsible Financial Innovation Act and the Digital Commodities Consumer Protection Act of 2022.
The far-reaching bill introduced in the last Congress by Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (D-N.Y.) would standardize definitions for the digital asset industry, direct the Federal Energy Regulatory Commission to study digital asset energy consumption and hand regulatory authority over digital asset spot markets to the Commodity Futures Trading Commission, among other provisions.
The narrower Digital Commodities Consumer Protection Act of 2022, the second-most cited piece of congressional legislation in lobbying disclosures from the cryptocurrency industry, would give the Commodity Futures Trading Commission jurisdiction to oversee digital asset spot markets.
Rostin Behman, chair of the Commodity Futures Trading Commission, appeared before the House Agriculture Committee to kick off the hearing on the new discussion draft.
Behman told the committee that regulations were “necessary” to prevent future crises like the collapse of the crypto trading platform FTX last fall, but emphasized the agency would need resources to enforce those new regulations.
“Simply put, we know how this ends. Leaving billions of dollars in customer funds and investments in largely unregulated entities is a recipe for disaster,” Behman said. “I believe the broader digital commodity market should be subject to similar time-tested regulations focused on protection of customer assets, surveillance of trading activity, prohibitions on conflicts of interest, and imposition of cybersecurity standards.”