This morning in a sun-dappled conference room high above the streets of Manhattan, a crowd of lawyers and journalists got a preview of crypto’s coming legal Ragnarok. It was the U.S. Securities and Exchange Commission (SEC) vs. Coinbase, months early – albeit slightly more polite and vague than things will be in any coming court showdown.
The fireside chat, sponsored by Rutgers School of Law and the law firm Lowenstein Sandler, ranged well beyond legal formalities to matters of principle and theory. The latter included the question of why, or whether, cryptocurrency should be allowed to exist in the United States at all.
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In the end, the forum encapsulated the broader challenge of the crypto-regulatory dialogue: how frequently the two sides seem to be talking past each other.
The law is the law
In one corner was SEC Director of Enforcement Gurbir S. Grewal, who laid out his rationale for the SEC’s enforcement suit against Coinbase in conversation with Rutgers law professor Yuliya Guseva. Grewal characterized the suit as the logical endpoint of a series of clear signals sent over the past five years or more, starting with the 2017 DAO report.
“In any other space, if you’re working incrementally, you’d see increased compliance,” Grewal observed. “[In crypto], we haven’t seen that, so we’ve had to change strategy.” In other words, in Grewal’s view, the SEC lawsuit came down against Coinbase because the exchange didn’t respond to earlier warnings.
Grewal also provided some insight into the decision to pursue exchanges including Coinbase and Binance, rather than continue individual enforcement actions against violating token issuers.
“I have less than 1,300 people” on staff, Grewal said. “Every year I have 700 recommendations we bring to the commission. We can’t be everywhere all at once … When we’re evaluating cases to bring, we have to make judgment calls.”
Grewal also offered insight into other outstanding questions, including the challenge of regulating decentralized exchanges (DEXs). “I’ve seen entrepreneurs and individuals in the center of all of these” supposedly decentralized projects, Grewal said. “Maybe it will present a challenge one day, but we see entrepreneurs at the center of all these projects.” In other words, as Gary Gensler made clear at the outset of his tenure, simply saying you’re decentralized is no defense.
In a final notable comment, Grewal put crypto influencers on notice. In particular, he warned YouTubers and others that he and the agency are watching for attempts to exploit members of minority groups. “They’re [promoting crypto with] the promise of financial inclusion to a segment of the population that has been excluded from traditional finance. That’s offensive to me … I find that conduct to be some of the most egregious conduct we’ve dealt with,” he said.
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The loyal opposition
Hot on Grewal’s heels, though, came a conversation with Coinbase Chief Policy Officer Faryar Shirzad, who prior to joining Coinbase in 2021 served as head of government affairs for Goldman Sachs and spent time in the George W. Bush White House.
On the confrontation with the SEC, Shirzad barely hedged his speculation that the SEC is stepping on an ongoing legislative process – an argument Coinbase has also made in legal filings under the Administrative Procedures Act.
“The normal dynamic in Washington [D.C.] is that when the constitutional branches of government are [acting], typically regulators will step back and let the political branches figure it out,” said Shirzad. “It’s not typical that you’ll see congressional action moving in earnest, and not just a government department, but a regulatory agency, rush in to redefine facts on the ground to get ahead of that. I don’t know if that’s happening here … but if that were happening, it would be unusual.”
“I don’t know whether there’s a dimension of legislative strategy to this,” Shirzad mused. “And there’s the chairman saying we don’t need more digital innovation, so there may be some of that.”
That gets close to the heart of the matter. While the SEC says it’s enforcing the law, the industry has struggled to make the practical case that existing law doesn’t work for many blockchain-based digital assets.
Shirzad further advanced the case that basing crypto regulation only on existing law will harm U.S. competitiveness and innovation.
“This is not just a convenience issue over whether one industry can operate in the United States. We’re at a critical juncture … blockchain is the value layer of the internet. That has significant implications,” Shirzad said, citing several ongoing blockchain pilot projects by the likes of JPMorgan as evidence.
Even more pointedly, Shirzad highlighted that the SEC’s approach may be counter to the agency’s own goal of investor protection.
“To the extent it becomes part of public policy to push exchanges offshore, you’re pushing that nexus between policy and U.S. law out of the perimeter of U.S. law. That’s a big deal. This has to be a matter of national strategy,” he said.
If there was one clear takeaway from this warm up match, it may be that the opponents each want to fight on a different battleground. For the SEC, it’s all a matter of the law, as written and strictly interpreted.
For Coinbase, meanwhile, what’s at stake is a future that hasn’t been written yet.