The news is particularly damaging to Coinbase because the company, since its founding, has positioned itself as the “white knight of cryptocurrency” – a company that has remained on the right side of regulators even while others in the industry have played quickly and loosely. so what happened?
Bloomberg’s Max Shafkin blames Coinbase’s ill-advised decision a few years ago to “switch to shitcoins”. A familiar term in the crypto world, “shitcoins” usually refer to digital tokens that have no apparent benefit beyond speculative hype. (The Chafkin piece is not subtly illustrated with coins exploding from the toilet.)
Chafkin’s broader point is that Coinbase spent years building its reputation, but then wasted it all in the embrace of shitcoins. This included promoting the likes of the new currency Dogecoin to young and inexperienced investors, many of whom have incurred losses of 80% or more. Meanwhile, the decision to add shitcoins also opened the door to the insider trading scheme of the rogue Coinbase manager.
None of this is a good look for Coinbase. But on the other hand, the company faced an impossible dilemma: it could have been stuck offering bitcoin and ethereum even as competitors lured its customers with hundreds of new assets or also offered shitcoin to stay in the competition. She chose the latter and is now in trouble.
It’s easy to blame Coinbase executives for this situation, but the ultimate blame lies elsewhere – specifically with the SEC. For years, Coinbase and others in the industry have begged the agency to provide clear rules on how securities law should apply to the crypto world. For years, the SEC refused to do so, instead taking a “regulation by application” approach that forced companies to guess what the agency would do.
The situation has only worsened under the current chairman of the Securities and Exchange Commission, Gary Gensler. Unlike his predecessors, Gensler is not a lawyer and has used the position to engage in naked partisan behavior aimed at raising his profile with Democratic Party dignitaries such as Elizabeth Warren.
In doing so, Gensler sought to hit mainstream companies like Coinbase, which (mostly) followed the rules while letting the worst actors go off. Two of the biggest cryptocurrency hacks this year — the collapse of the Ponzi-like stablecoin Terra and the bankruptcy of lender Celsius — occurred at Gensler’s watch, and the SEC failed to intervene in time. As a result, small investors come out with billions of dollars.
Then there is the question of how the investigation into Coinbase by the SEC – which is supposed to be a secret like all these investigations until the indictment – ended up in the media in the first place. Some on Twitter have I suggested Gensler leaked the investigation to Bloomberg to penalize Coinbase, which had publicly complained about the SEC’s behavior. That’s almost certainly the case, a veteran crypto lawyer familiar with Washington, DC tactics told me, saying that Gensler’s fingerprints are in previous leaks to The Wall Street Journal.
Meanwhile, the Securities and Exchange Commission has also come under fire for its handling of itself by senior officials who have left the agency to take advantage of private law firms. The most egregious example is presented in a new show that shows how a lack of oversight allowed former SEC lawyers to use their ties to the agency to manipulate the whistleblowing program and earn tens of millions of dollars.
So Mr. Gensler might want to put his house in order before torturing the likes of Coinbase. In particular, he must stop political hoaxes and provide a framework to help cryptocurrency and blockchain – one of the most important technologies of this century – thrive on America’s shores.
It is unlikely that he will but that may not matter. The debate over how to regulate cryptocurrency is moving beyond the SEC and toward other agencies, including the CFTC, who have recognized the importance of innovation as well as protecting consumers from harm. Come January, when Republicans are expected to take control of the House, we can expect Congress to use subpoena power to force Gensler to explain exactly what he was doing.
The bottom line is shitcoins landed in Coinbase’s affair with the SEC, but given the fallout from the shitcoin boom, it’s the SEC that has a lot more explanation to do.