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

Bankless Nation, we have a special bonus episode for you today. Cause 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 gonna give us all of the details in the rundown. What's important about this episode? What are we doing today?

Two big things. Uh, 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. Uh, 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 uh for the last two weeks like, man, Gary really seems to be Icarusing. Is this the final moment where Gary starts to turn over and decline?

Uh, we don't know. Uh, but these are important moments in the history of this industry. Uh, 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's 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, gotta let you know a message from our friends and sponsors over at There we go, guys. Uh this story is developing in the moment. So this is some news that just uh launched today. And also uh I've noticed some tweets from Gary Gensler um also you know putting his position out there that he's given the SEC has given enough clarity to crypto. So uh this is definitely a toe 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. But before we do, we want to thank the sponsors that made this episode possible, including our friends and sponsors over at

Bankless Nation, we are here with Paul Greywall, the chief legal officer of Coinbase, both here on screen and also his Twitter account as well, where he recently tweeted out today we filed a narrow action in the US 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. Uh and so here is uh what it was filed. This is the uh and this is the petition. And so, Paul, I got some questions. Uh, what does this mean as a as a lawyer? Uh, can you just kind of walk us through just the the logistics of this? Like what 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 mandamus. 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 almost nine months ago, give or take, we filed a formal petition for rulemaking with the SEC. And in that petition, we asked 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, in media interviews, even in testimony to Congress.

uh just recently that they've made up their minds and they know the answer to that question. And 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 1,700 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 uh permitted under the law. And although we we never relished the opportunity to go to court uh 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, uh, we certainly could, and we certainly can hear uh let our voices be heard in various ways, and I think we'll have some calls to action for the bankless community in how to get involved. Uh let me ask you though, high level. So you you're just asking for some clarity on the rulemaking. One thing that's been very emphatic in uh the testimonies that Gary Gensler provided in front of Congress is he said the crypto industry has already has the clarity. We've been quite clear. In fact, um uh Chair Gensler put out a video today specifying that he said this again. I'm not gonna get the quote direct, but we'll include a link in the show notes, people can go watch that three or four minute video. He said, I'm paraphrasing here, that um the crypto industry already has all of the clarity that it needs. The problem is not lack of clarity, the the 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 uh 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 2023 that this is all clear and that every digital asset, save Bitcoin, and perhaps ETH, 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 Howie 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 in positions.

And of course, you have other markets, 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 it's just not palatable or plausible that somehow all of this has been resolved, all of 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 uh 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 four the the prongs of the Howie test, right? I I haven't heard him be more specific than that, but is there any possible rationalized 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 have 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

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 that would 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 quoted them literally in our brief to the Third Circuit.

Paul, going back to this uh petition, the petition is to compel

the SEC to answer yes or no to a yes or a no question. And that question is are you going to provide rules for the crypto industry? And the you're 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. Look, and look, David, the answer to that question, as we all know, is is in fact, no, they are not going to give us rules.