How to Deal with Regulators: a Coinbase Primer

Lady Justice is bringing regulation to crypto trading platforms

You will find this amazing. On July 16th Coinbase told Bloomberg the SEC had approved Coinbase’s acquisition of three companies: Keystone Capital Corp., Venovate Marketplace Inc. and Digital Wealth LLC. Out of the three acquisitions, both Keystone and Venovate are broker-dealer firms registered with the SEC and members of FINRA.

This is probably why Coinbase thought they needed approval from the SEC, so they took their army of lawyers to Washington, had a nice chat and then made this announcement. Except that the next day Coinbase told Bloomberg that the SEC never approved these acquisitions. What gives?

Besides the public relations debacle, it shows that the team behind Coinbase is new to this world of regulation. This is strange for a company with a long list of lawyers who formerly worked at these agencies and who for so long has said that they are in compliance with securities laws. So how can this happen?

The first rule of the SEC is that they do not approve ANYTHING. Yes, you heard this right. The SEC allows companies to file a form S-1 to go public, and once the SEC has reviewed it, those companies are forbidden by law from saying the SEC has approved them.

In fact, this is written on the first page and IN ALL CAPS in the filing: The SEC neither endorses or approves this offering.

The same goes for a company that wants to become a broker-dealer. A company aspiring to become a broker dealer will file with the SEC and then await for FINRA to review a separate application they submitted. Once FINRA agrees to allow the company to be a member, then the SEC will recommend the company to become a member of FINRA. Where is the approval? There is none.

So how did Coinbase get into this situation? Perhaps Coinbase’s marketing team still does not understand regulation. Perhaps they are quick to the punch with hot and sizzling news, knowing that they operate in a marketplace mainly driven by hype. Remember when Coinbase announced Bitcoin Cash would be traded on their platform and the company was exposed to controversial rumors that their internal staff were trading in advance of this announcement because Bitcoin Cash traded up a few days prior to the public statement? This is insider trading, which is illegal in the United States, and a flag that Coinbase may not be quite as compliant as they would like us to believe.

So the very first rule of being regulated is to not tell the general public that the company is endorsed or approved by these regulators because they do no such thing. Frankly, regulators are not interested in how successful the business is going to be or not. The job of regulators is just to protect the general public from being defrauded, deceived, and bluntly ripped off by unscrupulous financial firms. That job is simple enough, and one that is hopefully noted by the cryptocurrency marketplace as token trading increasingly becomes recognized as the trading of securities and regulated as such.

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