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> are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. This doesn't appear to be what the SEC i

> are typically required to be separate due to conflicts of interest that emerge when one entity controls all of them. This doesn't appear to be what the SEC is suing Coinbase for though, and is actually far more applicable to the question "then why were they allowed to go public?" It's possible (likely even) there are nuances I don't grok, but sued for selling unregistred securities is not the same as requiring structural separation.

shagie 3y ago
SEC filing by Coinbase as a free writing prospectus related to their S1 - https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/334fdd06-47cb-4c39-8b33-4acb4b972d00.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/334fdd0... QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia Alesia: All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question. Alesia: So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders. Alesia: So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction. --- The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities. https://www.sec.gov/litigation/complaints/2023/comp-pr2023-102.pdf https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1... > The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk. It's that they are unregistered as any of those things. > 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].
- KingOfCoders 3y ago
  "What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict." We have illegal weapons but what is special with us, we won't use them. So it's not illegal.
  - Dylan16807 3y ago
    No, because they also argue the weapons are not illegal. Your analogy implies they said "yes they are securities", and they definitely didn't do that.
    - xwolfi 3y ago
      But they are securities, it's a completely absurd stance to pretend they're not...
      - Dylan16807 3y ago
        The SEC apparently won't decide if Ethereum is a security so it seems pretty complicated to me. I'm not going to insist the answers are obvious in such a legal minefield.
        vkou 3y ago
        What does that have to do with the price of butter? Coinbase isn't being sued because it's trading Eth. It's being sued because it's trading a lot of things that aren't BTC or Eth.
        Dylan16807 3y ago
        > It's being sued because it's trading a lot of things that aren't BTC or Eth. Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity. If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...
tikhonj 3y ago
My understanding is that having that structural separation is part of what is required to be registered as a securities exchange, and Coinbase is being sued for being an unregistered securities exchange. (That's why the question of whether crypto tokens are securities is important in this case.)
JumpCrisscross 3y ago
> far more applicable to the question "then why were they allowed to go public?" The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.
- Dylan16807 3y ago
  Well maybe they should? At least big ones. They don't need to make "merit-based judgements" to do the same security analysis they'd do after the IPO.
  - hurtuvac78 3y ago
    Would you really want a big government agency to decide on the merit of your business ehen you IPO? That seem like a good way to increase IPO's hurdles and slow down innovation.
    - Dylan16807 3y ago
      > Would you really want a big government agency to decide on the merit of your business ehen you IPO? I said the exact opposite of that. Please look at the second sentence again. I want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more.
      - JumpCrisscross 3y ago
        > want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more Investment banks would love this. It’s pro bono legal advice. If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
        Dylan16807 3y ago
xwolfi 3y ago
It is a criminal offense to represent that because the SEC acknowledged the IPO it also approved of the business: it is even written in the Coinbase's IPO prospectus, as Molly points out...

shagie 3y ago

SEC filing by Coinbase as a free writing prospectus related to their S1 - https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/334fdd06-47cb-4c39-8b33-4acb4b972d00.pdf https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/334fdd0... QUESTION 17: “Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." -- TidewaterVirginia Alesia: All right. Question 17. "Coinbase plays the role of both broker, executing trades on behalf of clients, as well as an exchange, matching buyers and sellers. This is a unique situation. In other markets, i.e. equities, a broker would be required to be legally independent of an exchange. Could you talk about how Coinbase operates as both a broker and an exchange? It seems like there are some conflicts of interest in the current situation." This is from TidewaterVirginia. Thank you so much for this question. Alesia: So it's true. On our retail side, we operate a full broker that includes the retail brokerage piece, as well as custody embedded in that retail trading experience. On the institutional side, we operate an exchange, a broker, and then a custodian. What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict. We do not proprietarily trade against our clients. What this means is that we're only executing orders on our customer's behalf and seeking for the best execution on those customer's’ orders. Alesia: So when an institutional customer engages with our broker, for example, we're routing that order across multiple liquidity venues; many trades on our own exchange, but oftentimes it trades outside of Coinbase as well, wherever the best price may be for that customer. In doing this, it is an agents-only model. There's no conflict of interest for us operating both the exchange and the broker, because we are ensuring that we're acting in our client's best interest at every point in the transaction. --- The issue isn't so much that they're doing this, but what the corresponding implications of it when related to unregistered securities. https://www.sec.gov/litigation/complaints/2023/comp-pr2023-102.pdf https://www.sec.gov/litigation/complaints/2023/comp-pr2023-1... > The Coinbase Platform merges three functions that are typically separated in traditional securities markets—those of brokers, exchanges, and clearing agencies. Yet, Coinbase has never registered with the SEC as a broker, national securities exchange, or clearing agency, thus evading the disclosure regime that Congress has established for our securities markets. All the while, Coinbase has earned billions of dollars in revenues by, among other things, collecting transaction fees from investors whom Coinbase has deprived of the disclosures and protections that registration entails and thus exposed to significant risk. It's that they are unregistered as any of those things. > 8. By engaging in the conduct set forth in this Complaint, Coinbase has acted as an exchange, a broker, and a clearing agency, without registering as an exchange, broker, or clearing agency, in violation of Sections 5, 15(a), and 17A(b) of the Exchange Act [15 U.S.C. §§ 78e, 78o(a), and 78q-1(b)(1)], and for purposes of Coinbase’s violations of the Exchange Act, CGI was a control person of Coinbase under Exchange Act Section 20(a) [15 U.S.C. § 78t(a)]. In addition, through its Staking Program, Coinbase has offered and sold securities without registering its offers and sales, in violation of Sections 5(a) and 5(c) of the Securities Act [15 U.S.C. §§ 77e(a) and 77e(c)].

KingOfCoders 3y ago
"What I think is important about the Coinbase business model is that we have set up our business such that there's not a conflict." We have illegal weapons but what is special with us, we won't use them. So it's not illegal.
- Dylan16807 3y ago
  No, because they also argue the weapons are not illegal. Your analogy implies they said "yes they are securities", and they definitely didn't do that.
  - xwolfi 3y ago
    But they are securities, it's a completely absurd stance to pretend they're not...
    - Dylan16807 3y ago
      The SEC apparently won't decide if Ethereum is a security so it seems pretty complicated to me. I'm not going to insist the answers are obvious in such a legal minefield.
      - vkou 3y ago
        What does that have to do with the price of butter? Coinbase isn't being sued because it's trading Eth. It's being sued because it's trading a lot of things that aren't BTC or Eth.
        Dylan16807 3y ago
        > It's being sued because it's trading a lot of things that aren't BTC or Eth. Which the SEC was also refusing to rule on, even though it would have been easy and consumer-protective to get that done within a month or two of the coins gaining popularity. If I don't treat that as uncertainty, I guess I have to assign significantly worse motivations...

tikhonj 3y ago

My understanding is that having that structural separation is part of what is required to be registered as a securities exchange, and Coinbase is being sued for being an unregistered securities exchange. (That's why the question of whether crypto tokens are securities is important in this case.)

JumpCrisscross 3y ago

> far more applicable to the question "then why were they allowed to go public?" The SEC does not approve IPOs. This is made abundantly clear in the law and rules, it is hammered into every first-year securities candidate as part of their licensing and it is front and centre on every S-1.

Dylan16807 3y ago
Well maybe they should? At least big ones. They don't need to make "merit-based judgements" to do the same security analysis they'd do after the IPO.
- hurtuvac78 3y ago
  Would you really want a big government agency to decide on the merit of your business ehen you IPO? That seem like a good way to increase IPO's hurdles and slow down innovation.
  - Dylan16807 3y ago
    > Would you really want a big government agency to decide on the merit of your business ehen you IPO? I said the exact opposite of that. Please look at the second sentence again. I want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more.
    - JumpCrisscross 3y ago
      > want them to decide if I'm trading securities, especially when "this might be considered a security" is in my S1. Nothing more Investment banks would love this. It’s pro bono legal advice. If this is important, require a legal opinion or no-action letter prior to investing in the IPO. Coinbase didn’t secure those and investors didn’t demand it. Here we are.
      - Dylan16807 3y ago

xwolfi 3y ago

It is a criminal offense to represent that because the SEC acknowledged the IPO it also approved of the business: it is even written in the Coinbase's IPO prospectus, as Molly points out...