Chain Reaction

Coinbase continues fight for crypto clarity post-SEC suit (w/ Paul Grewal)

Episode Summary

This week, we have a bonus episode! Jacquelyn interviewed Paul Grewal, chief legal officer at Coinbase. This week, Grewal has been busy testifying before Congress and addressing recent legal ramifications Coinbase faced. On Tuesday, the SEC sued Coinbase for securities laws violations, just one day after the agency sued Binance, the world’s largest crypto exchange. Separately, on Tuesday, the U.S. Court of Appeals for the Third Circuit gave the SEC a deadline to respond to Coinbase to clarify its stance on a rulemaking petition that the exchange asked for in July 2022.

Episode Notes

This week, we have a bonus episode! Jacquelyn interviewed Paul Grewal, chief legal officer at Coinbase. 

Grewal has been at Coinbase, the second largest crypto exchange globally, for almost three years. Previously he was the vice president and deputy general counsel at Facebook, among other roles. 

This week, Grewal has been busy testifying before Congress and addressing recent legal ramifications Coinbase faced.

On Tuesday, the SEC sued Coinbase for securities laws violations, just one day after the agency sued Binance, the world’s largest crypto exchange. Separately, on Tuesday, the U.S. Court of Appeals for the Third Circuit gave the SEC a deadline to respond to Coinbase to clarify its stance on a rulemaking petition that the exchange asked for in July 2022. 

Jacquelyn sat down with Grewal to dive into the company’s operations going forward, how it plans to deal with the legal process, its level of confidence amid the crackdown, and plans for best and worst case scenarios.

We also discussed: 

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Episode Transcription

Jacquelyn Melinek  0:01  

Hey everyone, its Jacquelyn Melinek Welcome to chain reaction, a show that unpacks and dives deep into the latest trends, drama and news with some of the biggest names in crypto breaking things down block by block for the crypto curious. So today we have a special bonus episode for our listeners. As many of you know this week has been pretty crazy in the crypto world by Nance the world's largest crypto exchange was sued by the SEC on Monday. And then on Tuesday, Coinbase was sued by the SEC as well, completely separate and for majority different reasons. With all that going on. Coinbase is pushing for regulatory clarity in the crypto ecosystem amid the legal battles they're facing themselves and to help the company in the industry get there is Coinbase is Chief Legal Officer and corporate secretary Paul Greenwald. He has been testifying this week before Congress addressing the legal ramifications Coinbase faced on Tuesday, and separately, the US Court of Appeals for the Third Circuit has given the SEC seven days to respond to coin bases request on a rulemaking petition that it filed back in July 2022. The situation just happened to coincide on the same day. So there's a lot going on with Coinbase right now. And I was able to sit down with him Paul gridwall. And to learn more about the company's operations going forward, how it plans to deal with the legal process, its level of confidence mid the crackdown, and how it's planning for the best and worst case scenarios going forward. I think this is a really interesting conversation, and I wanted to share it with you guys. So I hope you'll enjoy I guess the start obviously, I want to talk about the SEC situation. How long do you think this legal process will potentially take? And how much of a fight can Coinbase afford to fight? Like, how far are you guys willing to go?


Paul Grewal  1:57  

The legal process is important understand, was there actually several legal processes happening at once focusing on the SEC case against Coinbase? No, that's really all I'm going to be up to the court, which will preside over this case, it's unfortunately the reality that in many cases, courts take many months or even years to resolve the dispute between the parties. But I'm hopeful and confident we're gonna get to a resolution here sooner rather than later only because we believe the issues here are actually fairly straightforward relative to some of the other cases that were brought by the SEC in recent months and years. There's a separate case, though, Jacquelyn, that's going on that I think is equally important to pay attention to which is a case that Coinbase brought against the SEC asking of circuit court, in this case, the Third Circuit Court of Appeals to order the SEC to answer our petition for rulemaking that we filed last July. And in that case, just yesterday, hours after the SEC filed its suit, the Third Circuit on its own issued an order to the SEC to explain whether it had in fact reached a decision on rules for crypto, and if not when a decision would be coming. Perhaps most importantly, it noted that the SEC is decision to sue Coinbase. And the chair of the SEC statements suggested that the decision had already been made and simply not yet communicated. So that's a case that we think will move forward on a much more accelerated crack. But case to answer your second question, however long it takes Coinbase is committed to vindicating not just its rights, but the rights of the crypto community as a whole because we feel these issues are fundamental.


Jacquelyn Melinek  3:23  

And what is the chance that Congress moves soon enough to create crypto regulation to avoid litigation? Or is that even possible? Are they separate entities?


Speaker 2  3:32  

Well, in between the two lawsuits that I mentioned yesterday? Yeah, I had the pleasure of talking to Congress, I testified before the House Agriculture Committee on a draft piece of legislation that would create a nearly comprehensive framework for crypto for the very first time here in the United States. I was very encouraged Jacquelyn, by the seriousness of the questions from the congressmen and Congresswoman, they weren't engaged. They were thoughtful. And they were bipartisan in making clear that that committee at least sees a real need for sensible standards, and that the time to act is now now no legislation in Congress is easy. And even though both the chair of that committee, and as well as the chair of another committee looking at this issue of fosse Financial Services Committee, I've made it very clear they want to move quickly on this, you know, we think the odds are higher than they might have otherwise been that a new law could come into effect. Regardless, you know, we're gonna pursue these different avenues for clarity and certainty for crypto independently, we'll defend ourselves at court. And we'll continue to advocate for sensible legislation that finally in this kind of crazy system we have for ourselves here in the United States,


Jacquelyn Melinek  4:36  

for sure. I saw the video clip that Coinbase put out, you know, the one I'm talking about with all the details about the SEC and the staking and everything. I mentioned that Coinbase has spoken to the SEC a fair amount of times in the past, what were the previous conversations like? Were they receptive? Did you guys feel blindsided in a way by this or?


Speaker 2  4:56  

Well, we weren't blindsided by anything? This is a lawsuit that we've been preparing for now. For a while, because of course, the SEC told us back in March, it didn't tend to pursue litigation. And even well, before March, it became, it was abundantly clear to us that the SEC had no serious interest in dialogue or conversation around what sensible regulation might look like. The reason I say that, Jacquelyn, is that even as we were publicly advocating for rules through our petition that we had filed, we met privately with the SEC. In fact, we had 30 separate engagements, the SEC going back to last fall, in which we came forward with our own ideas for what registration could look like how a broker dealer and alternative trading system might work for crypto or even a national securities exchange, which is a very traditional and onerous model, but one that we thought could ultimately work if there were some reasonable accommodations for some of the features of this technology and of this market. Unfortunately, despite coming forward with multiple ideas on how this might actually work, and different ways that we could get to exchanges like Coinbase, registering with the SEC in a manner that they say they want, when it came time to get a response from the SEC, or to hear their ideas, or how this might work. We received nothing, we were simply thanked for our time and invited to leave.


Jacquelyn Melinek  6:07  

With everything going on right now. Do you think Coinbase can continue to operate without interruption during the suit, and what will be the future situation for the crypto assets on your platform that were listed in the filing as a quote unquote, security by their their depth? Well,


Speaker 2  6:21  

as I said, we've been preparing for this lawsuit for a long time. And so it's business as usual here Coinbase, we're going to defend ourselves in court. But you know, in the meantime, the business continues, and we're gonna continue to ship great products and services for our customers. As for the handful of assets that were accused in the case, we always consider new information when it comes to listing our assets. And so we will obviously do that here. But at least as things currently stand, we have no plans to delist any of these assets. And we want to continue to offer what we think are important products and services to our customers in ways that they've come to expect and deserve.


Jacquelyn Melinek  6:54  

Okay. And then what is Coinbase? His level of confidence right now, regarding the situation with crypto assets, it sounds pretty confident based off what you said, or on the stance of what is and what is not security? Well, we're very


Speaker 2  7:07  

confident that the status of crypto will remain strong. And that wants a court presided over by a federal judge with education and training experience these issues reviews, the respective positions, the parties, the courts gonna see that the SEC has simply misread the law here. So we're very confident of that position. And at the same time, as I said, we are confident that crypto is here to stay. And the reason we're confident Jacquelyn is already even in this relatively early phase of the technologies life 20% of Americans have bought or sold or otherwise traded crypto. That's a remarkable statistic. And so Americans are saying they want access to safe regulated products here in the United States. And the only challenge now is for safe regulations to be adopted that meet that expectation and allow this industry to continue to grow. So we are very confident. And the other thing I will say that gives us confidence is that whether or not crypto continues to thrive in the United States is one question. There's no question crypto is going to continue to thrive outside the United States. And that's one of the reasons why we find it so striking that even as other countries like the UK and Singapore and Australia, the European Union, they're all adopting strict firm but sensible rules for crypto, we have just one part of our federal government that seems to be insisting on a very different approach.


Jacquelyn Melinek  8:25  

I just want to go back for a second. We talked about the SEC Congress and kind of the sentiments there. We've seen it, we know it and you were there yesterday speaking with them, what regulatory agencies are most receptive to adopting this sector based on the conversations you've had? Well,


Speaker 2  8:41  

every regulatory agency we interact with is focused on keeping American consumers and investors safe. That's true at the Department of Treasury where we are supervised and licensed as a money services business. That's true, the Commodity Futures Trading Commission where we have licensed entities, and that's true at the state level, you know, Coinbase was the very first company to receive a bid license in New York State and 44. Other states have issued Coinbase, money transmission licenses, all of these other agencies are just as committed as the SEC to protecting Americans. But they're also committed to developing sensible and flexible standards that accommodate this new technology in ways that allow this technology continue to grow. And the reason I think for that, I don't want to speak for any agency because that's not my place. But I think the traditional financial system leaves much to be desired. In fact, you know, 80% of Americans feel the traditional financial system is stacked in favor of incumbents and against the public. So I think state regulators and other federal regulators understand that we need a diversity of participants in the financial system in order to offer more Americans access to basic financial products and services. The only question is how to do that in a safe and compliant way.


Jacquelyn Melinek  9:50  

What do you think of the binance sec lawsuit?


Speaker 2  9:53  

I haven't studied it very carefully. It's only been available to the public for a couple of days. And I've had a few other things to do between now and then. To be fair, I think there are some very important differences between the case that was brought against binance. In the case that was filed against Coinbase. For example, in the binance case, you have not only allegations that certain tokens that were listed, or as securities and other products offered were securities, but you have very serious charges. And these are only charges at this point. But they're they're certainly allegations in the complaint regarding washe, trading, regarding proprietary trading without disclosures regarding abuse of customer funds, and a disregard for segregated accounts, and so on and so forth. You have the CEO charged in the case, personally, and you have an SEC, that is seeking an immediate seizure of assets in the form of a temporary restraining order. So all of those differences, we think, confirm that the case against by Nance is very different than the case against Coinbase. And so we'll see how things play out for both companies, I can speak for only this company and say that we've studied the allegations, we're confident in our legal position, and it's unfortunately have to go to court. But that's where we have to finally achieve clarity for the industry. That's where we'll go.


Jacquelyn Melinek  11:00  

Right. And Paul, all in all, what is the ideal outcome from the SEC case? And the other one you mentioned? Versus how is the company planning for a potential worst case scenario?


Speaker 2  11:11  

Well, ideally, what you would have is a dialogue in a public and transparent process that ultimately resulted in serious standards that will keep American consumers investors safe, but that recognize that blockchains operate differently. The settlement and clearing work fundamentally different when you're talking about digital assets, as compared to more traditional assets, that important limitations can be put into place to address legitimate concerns about conflicts of interest and commingling of customer funds. We can do this. We've sent people to the moon, we develop vaccines in this country, we could certainly draft basic rules that will allow investors to be protected on the one hand while promoting innovation on the other. But I'm not sure that we have a willing dance partner in one part of the federal government. And that's part of the problem. As for what this means for Coinbase and our business? Well, as I said, we're going to continue operating business as usual, we do have a significant business outside the United States nearly or approximately 20% of our top line revenue now comes from markets other than the US. So we're excited about what's happening in London, and Sydney, and in capitals and other parts of the world all all over. It's just unfortunately, we have to deal with this issue at the same time as we pursue those opportunities. And so that's what we're gonna do.


Jacquelyn Melinek  12:22  

All right, awesome. Paul, those were all my questions. Is there anything else you would like to add? Oh, the


Speaker 2  12:26  

only thing I would just say is don't sleep on that circuit court case. It's remarkable that the SEC was ordered to respond within seven days. That's one to watch. That's my tip of


Jacquelyn Melinek  12:35  

the day. All right, awesome. Well, thank you for taking the time to talk. I appreciate it. All right, thank you. Will be back every other week with interviews with top players in the crypto ecosystem. Catch us on Thursdays for interviews with experts in the web three space. You can keep up with us on Spotify, Apple Music or your favorite pod platform and subscribe to our companion newsletter also called chain reaction. Links to the newsletter and the stories we talked about can be found in our show notes and be sure to follow us at chain_reaction on Twitter. Chain Reaction is hosted by myself and produced by Yashad Kulkarni and Maggie Stamets with editing by Kell. Bryce Durbin is our Illustrator. Alyssa stringer leads audience development and Henry Pickavet manages TechCrunch his audio products. Thanks for listening. See you next time.


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