Why Coinbase Will Lose Its Battle with the SEC

(Also published in Law360 here)

Coinbase has recently begun a crowdsourcing public relations campaign against the SEC, a battle which Coinbase will lose . . . badly.

The spat started when high-flying media darling Coinbase, a popular and now publicly traded crypto-trading platform, began?marketing a cryptocurrency lending product called Lend. The Lend program purportedly plans to?allow some Coinbase customers to?"earn interest on select assets on Coinbase, starting with 4% APY on USD Coin (USDC).” U.S. regulators have raised concerns about these kinds of programs, including that the products are securities which require state and federal registration.?

According to Coinbase, its lawyers reached out to the United States Securities and Exchange Commission (SEC) to discuss its Lend product. But rather than providing assistance, the SEC staff instead served Coinbase with an SEC?Wells Notice, informing Coinbase of their intention to seek approval from the SEC Commissioners to file a civil enforcement action against Coinbase for violating the federal securities laws. A "Wells Notice" is a letter sent by the SEC to a prospective respondent, notifying them of the substance of charges that the SEC intends to bring against the respondent, and affording the respondent with the opportunity to submit a written statement to the SEC Commissioners outlining any of their defenses.?

According to Coinbase, the SEC issued the Wells Notice because of Coinbase’s failure to file a registration statement with the SEC for the offering of its Lend product, which the SEC believes is a security. (The SEC may have informed Coinbase of other allegations in its Wells Notice -- such as fraud, unregistered broker-dealer activity, unregistered fund activity and a host of other concerns --?but Coinbase has only discussed a charge relating to its failure to file an SEC registration statement for Lend.)?

After Coinbase received the Wells Notice, Coinbase orchestrated an online firestorm, beginning with a posting on its?blog by its chief legal officer decrying the SEC’s actions, followed by a?Twitter thread by its CEO calling the SEC's behavior "sketchy."?

Coinbase has also brazenly continued to market its Lend program, soliciting its customers and creating an?online waiting list?for customers seeking “pre-enrollment, available to eligible US residents except those residing in HI, NY & VT.”? Lend's terms are even included in?Appendix 6?of Coinbase's User Agreement.?

The SEC’s response to Coinbase’s bluster and bravado? Radio silence. Given that the SEC cannot comment on even the existence of an investigation, the only way that the SEC can actually comment on Coinbase’s conduct is with the filing of an enforcement action against them. So the world must wait to hear the SEC’s side.?

But the wait will probably be over soon. Given Coinbase’s defiance together with its marketing for “pre-enrollment" in Lend, Coinbase is essentially daring the SEC to file an enforcement action, and perhaps even providing substantial fodder for an emergency action to stop Coinbase's Lend-related efforts.

The SEC enforcement staff is undoubtedly working feverishly:

• Drafting the action memorandum recommending that the SEC Commissioners approve the filing of an enforcement action against Coinbase (and perhaps others);
• Sharpening up its legal arguments in consultation with staff from the SEC Division of Corporation Finance and Office of the General Counsel;
• Working with Chair Gensler’s Office to schedule or “calendar” its action memorandum for a closed commission meeting; and
• Lining up a litigation team to prepare court documents for immedaite filing soon after receiving the Commission’s approval.

Though Coinbase has fired the first salvo with its Blog and Twitter barrages, the SEC will undoubtedly respond with its own thunderous bombardment of devastating canon and ordinance – in the form of a hefty and far-reaching enforcement action. And just like other SEC forays into crypto-enforcement, when the gunsmoke settles, the SEC will be the only one left standing.?

This article explains why Coinbase’s Lend product is obviously a security, and why Coinbase’s tired and hollowed defenses; odd and screwball tactics; and brash and antagonistic strategies, will all fail.?

The Lend Program

In a typical DeFi crypto lending program (though they can vary in terms of description):?1) A DeFi platform user deposits/invests crypto with the DeFi platform; 2) the DeFi platform pools the crypto from that investor with other investors; 3) The DeFi platform lends that crypto to other Defi customers who pay interest; 4) Profits or losses on the program depend on the platform’s skill and expertise in investing the loaned crytpo; and 5) the DeFi platform pays some or all of the interest to the investors in the pool.

Based on Coinbase’s representations, Coinbase is proposing to structure its Lend program solely with a type of?stablecoin called USD Coin.?One USDC token is meant to be worth exactly one real U.S. dollar. It is therefore common to say that USDC is a?stablecoin?because its price supposedly demonstrates little to no volatility around the intended value.?Despite its nomenclature, the U.S. government has nothing to do with USDC; it is not legal tender; and it is not insured by the U.S. government. Moreover, investing in stablecoins has certain unique and dangerous risks.

The SEC, Securities Registration and "What is a Security"

Historically, the courts and the SEC have taken an extremely broad view of whether any kind of investment is a security. Indeed, the definition of “security” under?Section 2(a)(1) of the Securities Act of 1933?(and the nearly identical definition under?Section 3(a)(10) of the Exchange Act of 1934) includes not only a number of specific types of financial instruments, such as notes, bonds, debentures and stock, but also broad categories of financial instruments, such as evidences of indebtedness and investment contracts. Plainly crafted to contemplate not only known securities arrangements at the time, the definition of security was drafted to encompass any prospective instruments created by those who seek the use of the money of others on the promise of profits.

As predicted, the evolution of the securities markets has seen the arrival of technologically innovative non-traditional instruments beyond even the wildest imaginations of the drafters of the Securities Act. From eel farms, and ostrich farms to prime bank notes and ponzi schemes to initial coin offerings and simple agreement for future tokens (SAFTS), the song remains the same. Courts have found them all to be investment contracts which warrant SEC registration and the investor protections incumbent in that registration.?

Howey?and?Reves

The two cases that Coinbase claims the SEC cites as support for its Wells Notice are the 1946 Supreme Court decision?SEC v. Howey?and the1990 decision of?Reves v. Ernst & Young, the seminal cases when mulling questions of whether an investment product is a security.??

Howey?addressed?the question of whether a product is an "investment contract," and hence a security (applying the eponymous “Howey Test”) and Reves addressed the question of whether a product is a "note" and hence a security (applying the so-called “Familial Resemblance Test”).?

Howey. The four-pronged Howey Test states that a security is an investment contract in which a person: 1) invests their money; 2) in a common enterprise; 3) with an expectation of profits; 4) based on the efforts of the promoter or a third party. Coinbase’s Lend program easily meets all four prongs of the Howey Test:?

• Investment of Money Prong.?Coinbase customers invest USDC in Lend.?
• Common Enterprise Prong.?For this prong,?courts can look for “horizontal commonality” (pooling of money from multiple assets and pooling of profit/loss allocations) and/or “vertical commonality” (investor's profits or losses depend on the efforts of the others such as the promotor of the product, even if no other investors exist). Lend easily meets both commonalities. Horizontally, Coinbase is a pooling the USDC of its customers to fund “Lend loans” to other customers, and then allocating profits along lines of that pooling. Vertically, whether a Lend participant will profit will depend on the efforts of Coinbase in lending out the USDC.?
• Expectation of Profits Prong.?Lend customers are not investing for their health – they want to profit.?
• Profits Solely from the Efforts of the Promoter or a Third Party Prong.?Lend investors are putting their trust in Coinbase to profit. Lend investors have no say in how Coinbase runs the Lend program and Lend does not permit investors to participate in Lend-related decisions.??

Reves.?Another possibility is that Lend is a "note" and hence a security. Although the term “note” is included in the statutory definition of a security, case law has determined that not every “note” is a security. The definition specifically excludes notes with a term of less than nine months and courts have carved out a range of exemptions over the years for commercial paper type notes such as purchase money loans and privately negotiated bank loans. To reconcile these varying cases, the U.S. Supreme Court in?Reves?established the “family resemblance test,” to determine whether a note is a security.?

Per the “family resemblance test,” a presumption that a note is a security can only be rebutted if the note bears a resemblance to one of the enumerated categories on a judicially developed list of exceptions, as follows:??1) a note delivered in consumer financing; 2) a note secured by a mortgage on a home; 3) a short-term note secured by a lien on a small business or some of its assets; 4) a note evidencing a character loan to a bank customer; 5) a short-term note secured by an assignment of accounts receivable; and 6) a note which simply formalizes an open-account debt incurred in the ordinary course of business (such as a trade payable for office supplies); and vii) a note evidencing loans by commercial banks for current operations.

The “family resemblance” analysis requires:

• A consideration of the motivation of the seller and buyer (e.g. is the seller looking for investment and the buyer looking for profit?);?
• The plan of distribution of the note (e.g. is the product being marketed as an investment?);?
• The expectation of the creditor/investor (e.g. would the investing public reasonably expect the application of the securities laws to the product); and?
• The presence of an alternative regulation (e.g. will the product be registered as a banking product and the offered registered as a bank?).?

Applying the family resemblance test, Lend is also clearly offering a note, and hence a security.?

First off, Coinbase likens the Lend program to that of a savings account, where the Lend customer is looking for a profitable investment and Coinbase is looking for investors. Second, Coinbase is?marketing the Lend program as an investment. Third, investors (especially disgruntled ones) would certainly expect that securities regulation applies. Fourth, Coinbase is not a bank so their so-called savings account falls under no other regulatory jurisdiction and protection. Indeed,?Coinbase?states clearly on its Lend website?that “USDC is a digital currency and NOT legal tender. Coinbase is not a depository institution, and your USDC wallet is not a savings or a checking account. Your USDC wallet is not insured by the Federal Deposit Insurance Corporation (FDIC) or the securities investor protection corporation (SIPC).”?

That’s it – not very complicated at all. The Lend product passes both the Howey and Reves tests with flying colors. Period. End of story.?

Coinbase’s Losing Defenses, Tactics and Strategies

Coinbase’s blog post and Twitter rant seem more akin to a whiny dissertation of oft-used irrelevant, anecdotal and unpersuasive grievances, all easily rebutted, including:

• Coinbase derides the vagaries of the SEC definition of a security. But the definition of security?is historically flexible?so as to be “capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.” Indeed, by emphasizing elasticity in the regulation of securities, Congress and the Supreme Court intentionally anticipated/contemplated that issuers would devise new investment vehicles to raise funds from the public;
• Coinbase mocks the unfairness of the SEC’s mixed bag of crypto-related regulatory pronouncements. But quite to the contrary, SEC crypto-related pronouncements have been exhaustive, comprehensive, transparent, consistent and steadfast. Indeed, the SEC has gone the extra mile in publicizing its position concerning digital token offerings;?
• Coinbase falls back on that old SEC defense lawyer "go-to" that using SEC enforcement litigation to make law is wrong. But the stark reality is that litigation is how most securities regulation becomes law. Moreover, securities laws are often intentionally vague and require adjudication to clarify. Indeed, Howey and its progeny provide clear, explicit standards that courts have applied to SEC enforcement actions for decades, from investments in?eel farms?and?ostrich breeding?to?wholly bogus prime bank securities?and?digital coin offerings. Consider the bulk of insider trading laws, which are almost entirely judge-made. Critics have called upon the SEC to define unlawful insider trading for decades, and the SEC has never even attempted to do so;
• Coinbase has taken their case to the public via their blog and Twitter – rallying supporters against the villainous SEC. Famed entrepreneur and celebrity Mark Cuban has?also piled on, joining Coinbase in its SEC derision. But fighting with the SEC in public, whether via blog, Twitter, CNBC appearance or otherwise, never works out well. Good SEC defense lawyers always advise – don’t poke the bear, defiance can trigger an emergency enforcement action, which will cost tens of millions to defend and which will only result in a devastating loss;
• Coinbase asserts that?since they have only started a?waiting list, and not actually officially launched the Lend program, the matter is inchoate and not actionable. But the SEC is getting out in front of what the SEC believes is a securities violation, before investors are hurt. The SEC has?undertaken similar preemptive strikes in the past?and intervening as early as possible to protect investors is a pivot that Congress expects the SEC to make, and will often criticize the SEC for not doing. Moreover, though Coinbase has not begun its Lend program, it has begun?aggressively marketing Lend’s benefits to its customers for “pre-enrollment,” stating, “All eligible customers are currently invited to pre-enroll for USDC Lending by joining our waitlist. We will invite customers off the waitlist as the program becomes available. Once you are invited off the waitlist, you will automatically start earning interest on your entire USDC balance. Lend's terms are even included in?Appendix 6?to Coinbase's general User Agreement;”
• Coinbase complains that?other financial market crypto-players have been marketing programs similar to Lend and the SEC has not sued them. But, in addition to its being reminiscent of what a kindergartner might argue when chastised for using their phone during class, this argument is also wholly irrelevant. The SEC is forever limited in its resources and seeks out cases that will generate big headlines and “provide the biggest bang for the buck. That the SEC is singling out Coinbase is no accident. The SEC wants to send the loudest programmatic message to change industry behavior, by hitting the highest profile players while using as little of its precious resources as possible. Moreover,?several state regulators, including in?New Jersey, have accused other crypto lending platforms of violating securities laws – and the others that Coinbase references, well, those crypto-lenders might also receive Wells notices too; and?
• Coinbase cites the vagueness of SEC regulation as unfair and impossible to manage. But this “vagueness” argument, oft repeated and celebrated by crypto-believers on the lecture circuit, is a red herring. With respect to digital tokens and digital assets, never in its history has the SEC taken such drastic measures to make their views known.?For example, the SEC has used multiple distribution channels to share its message and concerns regarding cryptocurrencies, digital trading platforms, initial coin offerings, etc. SEC Chair Gary Gensler has clearly?focused on crypto lending?platforms in his speeches, alongside decentralized finance.?With respect to crypto generally, the SEC has publicized their position through countless?enforcement actions, multiple speeches,?a series of?Investor Alerts, a rare?Section 21(a) Report of Investigation,?Congressional testimony?and several?official SEC Statements?and?proclamations. In fact, Former SEC Chair Jay Clayton engaged in a massive multi-year crypto-tour, always speaking bluntly and thoughtfully about the need for digital token offerings to be registered and the many misconceptions in the digital asset marketplace.?Speaking at a legal gathering in January of 2018, Chair Clayton even went so far as to admonish the lawyers counseling clients engaged in digital coin and token offerings. To claim a lack of clarity and meaning amid such a concerted SEC effort for transparency, notice and candor seems sorely misguided to say the least.??

Telegram and Kik Redux?

The Coinbase hullabaloo mirrors the same incredulous defense assertions of a few years ago, when the SEC alleged that initial coin offerings (ICOs) in various iterations were securities. Then came the SEC victories in?dozens of ICO enforcement actions, especially the blockbuster SEC victories over Telegram and Kik.?

Telegram Group, Inc.. On?October 11, 2019,?the SEC filed an emergency action in U.S. District Court for the Southern District of New York (SDNY), and obtained temporary restraining order against two offshore entities conducting an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds.?According to the SEC’s complaint, Telegram Group Inc. and its wholly-owned subsidiary TON Issuer Inc. began raising capital in January 2018 to finance the companies’ business, including the development of their own blockchain, the “Telegram Open Network” or “TON Blockchain,” as well as the mobile messaging application Telegram Messenger. Defendants sold approximately 2.9 billion digital tokens called “Grams” at discounted prices to 171 initial purchasers worldwide, including more than 1 billion Grams to 39 U.S. purchasers. Telegram promised to deliver the Grams to the initial purchasers upon the launch of its blockchain by no later than October 31, 2019, at which time the purchasers and Telegram will be able to sell billions of Grams into U.S. markets. The SEC complaint alleged that defendants failed to register their offers and sales of Grams, which are securities, in violation of the registration provisions of the Securities Act of 1933.?

Kik Interactive Inc. On June 4, 2019, the SEC filed a?complaint, also in the SDNY, alleging that Kik sold digital asset securities to U.S. investors without registering their offer and sale as required by the U.S. securities laws. In early 2017, Kik sought to pivot to a new type of business, which it financed through the sale of one trillion digital tokens.?Kik sold its “Kin” tokens to the public, and at a discounted price to wealthy purchasers, raising more than $55 million from U.S. investors.

Telegram and Kik's respective offerings?utilized SAFTs, or "simple agreements for future tokens," in which companies enter into purchase agreements with sophisticated investors, relying on the registration exemptions afforded to offerings made only to accredited investors. Those purchase agreements contain the rights to receive digital tokens in the future, and SAFTs operate under the assumption that upon delivery, the tokens will have been developed to a point of functionality (like Bitcoin and Ether) wherein they could no longer be considered "investment contracts" under securities law. SAFTs originated as a work-around to avoid being caught up in U.S. securities laws by aiming to separate the initial capital raise from the distribution of the digital token.?

The Failure of Kik and Telegram’s Defense Claims

Kik’s primary defense was that Kin is not a security but a transaction currency or utility token akin to Bitcoin or Ether, which are not regulated as securities.?Telegram’s primary defense was that the SEC had conflated two distinct questions: 1) whether the Purchase Agreements at issue an offering of securities were; and 2) whether the underlying Grams were securities when delivered to the Initial Purchasers.

The Telegram matter wrapped up soon after Judge P. Kevin Castel ruled that the offer and planned distribution of $1.7 billion worth of Telegram's digital currency Grams qualified as an unregistered securities offering. Telegram settled with the SEC (without admitting or denying the allegations in the SEC's complaint, which is customary in most SEC settlements) and was enjoined from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933;?ordered to disgorge, on a joint and several bases, $1,224,000,000 in ill-gotten gains from the sale of Grams; required, for the next three years, to provide notice to the Commission before engaging in enumerated future issuances, offers, sales, and transfers of digital assets; and ordered??to pay a civil penalty of $18,500,000. Telegram was further required, for the next three years, to give notice to the SEC staff before participating in the issuance of any digital assets.

The Kik matter wrapped up soon after Judge Alvin Hellerstein found that the sale and distribution of Kin satisfied all the prongs of the Howey test (without declaring whether Kin itself was a security — and acknowledging that "every cryptocurrency, along with the issuance thereof, is different and requires a fact-specific analysis”). According to Judge Hellerstein, Kik had established a common enterprise when it said it would use Kin offering proceeds to fund its operations, including the "construction of the digital ecosystem it promoted."?Kik settled with the SEC (without admitting or denying the allegations in the SEC's complaint, which is customary in most SEC settlements) and was enjoined from violating the registration provisions of Sections 5(a) and 5(c) of the Securities Act of 1933; required, for the next three years, to provide notice to the Commission before engaging in enumerated future issuances, offers, sales, and transfers of digital assets; and ordered to pay a $5 million penalty.?

Thus, in both the Telegram and Kik cases, the presiding judges ruled that, despite their respective work-around attempts, the structure of the digital offerings met the Howey test and triggered SEC registration requirements. Unless Coinbase agrees to cease all operations relating to Lend, the same fate likely awaits all potential Coinbase/Lend defendants.?

SEC Prime Bank Enforcement Program (Déjà Vu All Over Again)

Coinbase’s declarative defenses bring to memory similar issues adjudicated during the early days of the?SEC’s prime bank enforcement program?way back in the 1990s. Prime bank frauds involved the sale to investors of so-called prime bank notes, a wholly fictional product, that purported to represent a financial interest in a secondary market for stand-by letters of credit.?

When the SEC started filing cases against prime bank promoters, the?defendants cried foul, arguing that the instrument involved was not a security. But federal judges all found otherwise, in particular famed economics scholar and 7th?Circuit Chief Judge Richard Posner who wrote the epic “prime bank fraud” opinion in?SEC v. Lauer?in 1995, whose words back then ring equally true today:

“An [“Investment Contract”] is a term of art?in the securities laws. It means an interest that is not a conventional security like a bond or a share of common stock but that, having the essential properties of a conventional security — being an undivided, passive (that is, not managed by the investor) financial interest in a pool of assets — is treated as one for purposes of these laws . . . This first argument of Lauer's blends insensibly into his second, that the securities laws do not apply to frauds so complete, so pure, that no pooling would ever take place. Prime Bank Instruments do not exist. So even if Konex had succeeded in raising money from additional investors, it would not have pooled their money to buy Prime Bank Instruments. It would either have pocketed all of the money, or, if what its masterminds had in mind was a Ponzi scheme, have pocketed most of the money and paid the rest to the investors to fool them into thinking they were making money and should therefore invest more (or tell their friends to invest). It would be a considerable paradox if the worse the securities fraud, the less applicable the securities laws. Lauer overlooks the fact that it is the representations made by the promoters, not their actual conduct, that determine whether an interest is an investment contract (or other security).”

Demonstrating just how broad and encompassing the definition of security is, the Lauer decision is truly a remarkable one, finding that even when an investment opportunity is wholly fictional, it can still be a security if what it purported to be was an investment contract.?

Coinbase is NOT Registered with the SEC as an Exchange, Which Triggers Added SEC Scrutiny

The SEC has likely undertaken special scrutiny of Coinbase because, despite its marketing and nomenclature, Coinbase is?not a registered exchange with the SEC. Indeed,?for the typical crypto trading platform, there exists no U.S. federal regulatory framework – it’s not just the Wild West, it’s not just caveat emptor -- it’s global economic anarchy.?

So when a customer has a problem with a cryptocurrency transaction, the customer is not afforded the myriad of protections and safeguards afforded by federal registration. For instance, with respect to U.S. federal regulation of crypto-trading platforms, there exists:

• No team of SEC, Federal Reserve, OCC, FINRA or other federal auditors and compliance experts not only inspecting and scrutinizing the fairness, execution and transparency of transactions and but also policing for fraud, manipulation and chicanery;?
• No liquidity, net capital or other depository or financial federal requirements;?
• No record-keeping and archiving requirements with respect to operations, communications, trading or any other aspect of business;?
• No requirements regarding the pricing or order flow of crypto transactions or the use internal platforms and payment systems by employees;?
• No adherence to federal statutes and rules prohibiting manipulation, insider trading, and other fraudulent behavior by customers or employees;?
• No mandated cybersecurity requirements or standards to combat hackers and protect customer privacy;?
• No mandated training or code of conduct requirements;?
• No mandated internal compliance, customer service or whistleblower teams to address and archive customer complaints;?
• No anti-fraud guarantee from a U.S. registered financial institution and, if any dispute or problem arises, no reversing of charges (typical cryptocurrency transactions are by definition irreversible);?
• No mandated process for customer complaint handling (and even if there was a formal complaint filing structure, the pseudo-anonymous nature of virtual currencies, ease of cross-border and interstate transport, and the lack of a formal banking edifice creates enormous challenges for law enforcement to investigate and apprehend any individuals who use cryptocurrencies for illegal activities); and
• None of the vigorous U.S. federal safeguards historically rooted in the DNA of U.S. financial institution registration and regulation. These sacrosanct standards and practices are not only the hallmark of U.S. financial institutions such as banks, investment companies, brokerages and other financial firms but have also rendered U.S. capital markets the most transparent, efficient, reliable, safe, trustworthy -- and most sought after in the world.

Looking Ahead

The SEC’s actions against Coinbase are not sketchy, rogue, regulatory turf-grabbing or political skullduggery. The SEC's Wells notice against Coinbase is spot-on.

In fact, the SEC’s actions fall squarely within its mission established in 1934. Back then, in response to the lack of investor confidence after the stock market crash of 1929, Congress enacted the Securities Act of 1933 (regulating the initial distribution of securities) and Securities Exchange Act of 1934 (regulating the post-issuance trading of securities). The ‘34 Act also created a "superagency" called the SEC to oversee intermarket issues and to enforce the ‘33 and ‘34 Acts.?

Designed to "eliminate serious abuses in a largely unregulated securities market," the ’33 and ‘34 Acts (and four others that followed -- the Public Utilities Holding Company Act of 1935; the Trust Indenture Act of 1939; the Investment Company Act of 1940; and the Investment Advisors Act of 1940), ended years of the kind of libertarian?laissez-faire?policy of business regulation that Coinbase epitomizes. The ’33 and ’34 Acts also ushered in a new era of extraordinary prosperity for investors, while simultaneously rendering U.S. capital markets the most desirable in the world.?

For almost 90 years, the SEC has generally stayed true to its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.?The Wells Notice to Coinbase falls squarely within these historical and critical regulatory confines.?

And while Coinbase might not want to register its Lend program as a securities product, it is hard to imagine any investor objecting. SEC registration means that the SEC, an independent and impartial 3rd?party, with only investor protection in mind, would ensure the fair, transparent and accurate depiction of all relevant information. The SEC would not render judgment as to the merits of the Lend program, but rather the SEC would police the candor, fulsomeness and clarity of its representations, to ensure that potential purchasers can make informed investment decisions.?

My take is that SEC registration would clearly keep Coinbase honest and keep its sales and marketing force in check. Is this really such a terrible thing??

On March 30, 2021, just weeks before Coinbase went public in a hotly anticipated debut on the Nasdaq stock exchange, Coinbase announced a major hiring coup d'état, snagging former SEC Trading and Markets Director Brett Redfearn. At the SEC, Redfearn oversaw a staff of 250 that took an active role in delineating the rules that would govern cryptocurrencies. That included the SEC’s oversight of bitcoin exchange-traded funds, custody of digital assets and alternative trading systems, or ATS, used for crypto trading.

At the time, Coinbase Chief Product Officer Surojit Chatterjee?wrote that?Redfearn "will be responsible for defining and driving a vision and strategy to set the global standard for crypto capital markets, including digital asset securities and our crypto trading platform." Redfearn?similarly gushed, “Working hand-in-hand with the outstanding engineers at Coinbase and innovators in the new crypto economy, I intend to help build a market ecosystem that creates new efficiencies and democratizes the investment process while being 100% compliant with our securities laws.”

About three months later, Redfearn left Coinbase on what Coinbase described as “amicable” terms.?

The world may never know the real reason behind Coinbase’s supposedly “amicable” split with Redfearn, which seems to have occurred smack dab in the middle of the SEC investigation of Lend. Perhaps Redfearn did his best to inform Coinbase higher-ups of the perils of Telegram and Kik and, despite Coinbase’s steadfast belief in Lend and eager engagement with the SEC staff, Redfearn knew that the Lend product was a security.?

My guess is that Redfearn felt uncomfortable with Coinbase’s aggressive market posture and disregard of the SEC’s admonitions and probably advised that Coinbase should at least cease its marketing efforts while discussions with the SEC continued.?

Whatever his reasons for leaving, Redfearn probably dodged a bullet because if Coinbase continues to offer Lend pre-enrollment, the SEC will have to act. And when the SEC hits hard, history will judge Coinbase’s swagger and braggadocio not only as arrogant crypto-patter, but also as flouting the most obvious securities regulation lesson of Howey and Reves --?that painting stripes on a horse will never make it a zebra.

*John Reed Stark?is president of?John?Reed Stark Consulting LLC, a data breach response and digital compliance firm. Formerly, Mr. Stark served for almost 20 years in the Enforcement Division of the U.S. Securities and Exchange Commission, the last?11 of which?as Chief of its Office of Internet Enforcement. He currently teaches a?cyber-law course?as a Senior Lecturing Fellow at Duke University Law School.?Mr. Stark also worked?for 15 years as an Adjunct Professor of Law at the Georgetown University Law Center, where he taught several courses on the juxtaposition of law, technology and crime, and for five years as managing director of global data breach response firm, Stroz Friedberg, including three years heading its Washington, D.C. office. Mr. Stark is the author of "The Cybersecurity Due Diligence Handbook."