# The reason why the CEO of Coinbase, the world’s first listed cryptocurrency exchange, was furious
[블록미디어 프로메타 연구소 최창환 소장] Coinbase is the world’s first cryptocurrency exchange to enter the stock market. It can be said that the digital asset market is a bridgehead for the existing economic system.
Brian Armstrong, the CEO of Coinbase, is a seasoned businessman. In order not to offend the supervisory authorities before the Coinbase listing, the cryptocurrency Ripple (XRP), which started a lawsuit with the Securities and Exchange Commission (SEC), was the first to delist. It also recruited senior executives from the SEC.
Brian Armstrong, CEO of Coinbase
Armstrong rushed to Washington as soon as the listing went smoothly. He met with Congressional and Fed officials to inform them about the digital asset market and to seek cooperation from policymakers. Armstrong, who was such a conformist, exploded on the 8th. He posted 21 consecutive tweets criticizing the SEC on Twitter. What happened?
# “Don’t do it for now. If you do, you will be sued.”
The case dates back three months. At the time, Coinbase was preparing a service that offered loans using cryptocurrencies as collateral. This is what is commonly referred to as staking in the virtual asset industry.
Typically, cryptocurrency investors entrust their coins to an exchange. Instead, they receive a fixed income distribution. The exchange lends the coins collected in this way to a third party in the form of a loan. A person who borrows cryptocurrencies must provide other cryptocurrencies as collateral. Profits are savory This is because the interest on the loan is high. Even if you share profits with customers, you can make money by brokering coin deposits and coin-backed loans.
On the other hand, Coinbase first designated a ‘stablecoin’ called USD coin as the target coin for staking. Later, it was planned to expand the service to other cryptocurrencies. A stablecoin is a coin with a stable value. 1 USD is pegged to 1 USD.
Coinbase executives contacted the SEC before launching the new service. It was to explain the contents of the service and to set the regulations to be followed in advance. The SEC requested various documents. Coinbase faithfully submitted the data. But the SEC’s final decision was “don’t do that service. If you ignore our warnings and do business, you could face lawsuits.”
# “Regulation for whom?”
“Crypto-crypto-backed loans are already being done elsewhere,” Armstrong said. “Why not Coinbase?” He said, “No one explains what kind of work or why it is a securities business, and there is only a threat not to do it because it will bring a lawsuit.” said
Armstrong CEO’s SEC accusation tweet. He sent out 21 tweets asking for clarification of the regulations. source = twitter
Armstrong CEO’s SEC accusation tweet. He sent out 21 tweets asking for clarification of the regulations. source = twitter
The SEC wants clear guidance on what should be allowed and why. The SEC refused to explain in writing, accusing it of using blackmail tactics instead. “If the SEC is blocking the provision of new services, it is doing great harm, not protecting consumers,” Armstrong said.
Armstrong also talked about meeting with government officials in Washington in May.
“I had meetings with members of Congress and other heads of federal government. It was shortly after becoming the first crypto company to go public in the United States. Even though I confirmed my appointment with SEC Chairman Gensler just over a month ago, the SEC ended up refusing to meet.”
“We are under threat of getting legal action from the SEC before we even bring our products to market,” Armstrong said. I hope you do,” he pleaded.
# Changing markets, chasing policy authorities
The conflict and clash between the SEC and Coinbase immediately attracted the industry’s intense attention. Coinbase shares also fell sharply on the same day. This is because Coinbase, which has just entered the stock market, collided head-to-head with the SEC. This is unimaginable in our country. How dare you go against the authorities.
The conflict between the SEC and Coinbase is a symbolic event of the huge change that the US financial market is currently facing. The rise of digital assets is disrupting existing markets and supervisory systems. The controversial staking is creating a new market called DeFi by combining it with blockchain technology.
It is a financial service that automatically executes cryptocurrency deposits and loans by the program. The SEC appears to be afraid of the ripple effect of Coinbase’s cryptocurrency-backed loans. There is no choice but to worry about whether it is acceptable to accept services that are difficult to understand even with the framework of existing regulations.
The SEC wants to buy time to understand the new digital finance. Therefore, they have no choice but to apply the classical regulatory framework until they fully understand the market situation. From the SEC’s point of view, the reporting of imputation is to bundle coins in the category of ‘security’. Once it is identified as securities, it will be regulated according to the existing securities laws.
So, what are securities? The precedent used by the SEC is the Howey Test, which was created in the 1940s. According to this case law, “nearly everything that makes one expect to benefit from the actions of others is a contract in a securities investment.”
In accordance with this principle, the SEC will indict the cryptocurrency Ripple in December 2020 for selling unlicensed securities. The 80-year-old legal system is still being applied in the 21st century.
# The market grew too fast
Bloomberg reported a comment from a former SEC official on the Coinbase-SEC clash. He was surprised to see the attitude of the SEC. The SEC usually waits for an investment product to sell before cutting back on regulation. However, this time, he gave a warning before the product even came out and foretold a lawsuit. The lawsuit was chosen as a powerful way to block cutting-edge cryptocurrency products. “The SEC has become very aggressive for the first time in a really long time,” said James Cox, a professor at Duke University’s Law School.
Since the market is too advanced for regulations and systems to follow, they are using a strategy to block the ‘Security Act’ with a weapon. SEC Chairman Gary Gensler himself has used the phrase “Western”.
SEC Chairman Gary Gensler
# Crypto Revolution, the next battlefield is DeFi
“Coinbase represents financial innovation,” said RA Farocania, a professor at Columbia Business School, in an interview with MarketWatch. “What we are seeing is the crypto revolution, and the next battlefield will be DeFi,” he added.
The SEC has also put out the fire with a lawsuit, but it is not standing still. For example, Uniswap is the largest DeFi platform. The Wall Street Journal reported that the SEC is collecting extensive data from related companies and conducting research on crypto finance such as DeFi. Professor Parokania said, “It has been several years since cryptocurrency has become a part of the financial ecosystem, but there is no clear regulatory framework. The SEC is also in the process of creating a regulatory framework while studying.
It is perhaps natural for financial authorities and innovative companies to conflict and clash over a new market. It is important to be prepared to find a solution through dialogue and logic. Professor Parokania stressed that the SEC must demonstrate its willingness to work with industry.
What about the Korean financial authorities? I remember a high-ranking official who shocked the mayor by saying, “Government exists to rule.” Can we do financial innovation?
* This article was published in the Hankook Ilbo on September 18. Bitcoin Column Before Ride It is posted in the corner.
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