Coinbase has decided to further dig in its heels against regulatory pressure from the Securities and Exchange Commission (SEC), with CEO Brian Armstrong calling out the commission’s chair Gary Gensler, and the crypto exchange’s legal chief hitting back at an SEC proposal that would amend custody rules for registered investment advisors (RIAs).
In a 23-page letter to the SEC, Coinbase’s legal head Paul Grewal outlined many ways in which the exchange doesn’t agree with major revisions proposed to the investment adviser custody rule. Grewal explained that the SEC is seemingly making assumptions about crypto that would do harm to investors.
“While we agree with some of the measures outlined in the Proposal, we are concerned that, in its current form, the Proposal makes unwarranted assumptions about custodial practices based on the Commission’s experience with securities,” the letter stated.
“These assumptions are not necessary or appropriate, and could be detrimental to consumer protection for other asset classes, including crypto assets (whether or not they are securities).”
- A registered investment advisor (RIA) advises clients on investments and can leverage their portfolio.
- Firms that act as RIAs, like Coinbase, are registered with the SEC or state-regulated trust companies.
- The SEC submitted its proposal to amend the RIA rules on February 15, 2023.
Grewal argued that, although the SEC’s proposal widens the scope of RIA custody obligations from “funds and securities” to all client assets, including crypto, it doesn’t adequately change the requirements to reflect that expansion. The letter requests that the SEC keep state-regulated trust companies as qualified custodians — even though Coinbase Custody would retain its position under the proposal.
“This works well today, so there’s no reason to disrupt longstanding Congressional and SEC policy,” Grewal explained in a Twitter thread summing up his letter. The Coinbase legal chief further wrote, “Second, the proposal would ban RIAs from trading on non-QC crypto exchanges. This wouldn’t benefit RIAs or their clients and would in fact harm them. Thus the SEC should allow limited non-QC exposure so RIAs can trade crypto for their clients.”
Additionally, the letter outlined these requests and amendments:
- The SEC should allow RIA client assets limited exposure to non-qualified custodian environments.
- Standards of care, indemnification, and insurance requirements should be tailored by asset class.
- Sophisticated investors should be allowed to negotiate their own custodial arrangements.
- The SEC should revise the proposal to allow RIA custody in additional circumstances to account for early-stage crypto tokens and more.
- A unified possession or control standard should be adopted so that investors can hold crypto assets with a broader range of custodians.
- The SEC should alter the external reconciliation requirements to let qualified custodians use the best available data.
- The commission should direst staff to modify accounting guidance in accordance with the proposal, so that companies and banks can hold crypto assets without recording them on balance sheets.
Coinbase chief Brian Armstrong says SEC is on ‘lone crusade’
In March, the SEC served Coinbase with a Wells Notice, warning that the firm was likely selling unregistered securities and therefore violating federal law. This prompted a strong response from Coinbase: “We do not relish litigation against the SEC, but we will vigorously defend ourselves.”
The following month, Coinbase sued the SEC over an administrative matter.
Now, along with the letter by Grewal, Coinbase chief Brian Armstrong has decided to publicly double down on his bad blood with the commission. In an interview with CNBC on Monday in Dubai, the CEO said “The SEC is a bit of an outlier here. There’s kind of a lone crusade, if you will, with Gary Gensler, the chair there, and he has taken a more anti-crypto approach for some reason.”
“I don’t think he’s necessarily trying to regulate the industry as much as maybe curtail it,” Armstrong elaborated. “But he’s created some lawsuits, and I think it’s quite unhelpful for the industry in the US, but it also is an opportunity for Coinbase to go get that clarity from the courts that we feel will really benefit the crypto industry and also the US more broadly.”
In the same interview, Armstrong announced that the firm wasn’t going to relocate overseas — after suggesting Coinbase was exploring the option last month. “We’re always going to have a US presence … But the US a little behind right now,” he said.
It appears that Coinbase has committed to its fight, not flight approach.