coinbase CEO Brian Armstrong is in abattle with Regulators the SEC sued hiscompany saying coinbase broke the rulesby listing tokens that the regulatoralleges are subject to Securities lawshe sat down with the journal to discussthe situation this doesn't seem like onewhere there's a lot of dispute about thefacts you're trading cryptocurrencies oncoinbase the question really is are youbreaking the law and is what you aretrading a security so take us throughhow you think about this case from alegal standpoint we're not disputingfacts here or disputing interpretationof the law what's your interpretation ofthe lawwell okay so let's let's zoom out for aminute so if we go back to 2021 you knowcoinbase we wanted to become a publiccompany we described everything aboutour business the assets that we list onour platform How We Do staking and theSEC at that point allowed us to become apublic companyand you know fast forward you know ayear later we started to hear someconflicting statements from the SEC thecftc generally when we hear updatedinformation from Regulators we go in andwe talk to them we say great if therules have changed how can we adjust andyou know an example of that was theysaid xrp we think might be a security wesaid okay we want to act in good faithwe'll de-list it we don't know if it's asecurity or not and that court case isstill playing out but you know we wantto be collaborative and work withregulators and then something shiftedabout a year agoum a totally different tone started tohappen and we kind of got thisinformation from the SEC that wellactually we think everything other thanBitcoin is a securityand we kind of said to ourselves wellthat's not our understanding of the lawyou know how are you coming to thisconclusion and we were sort of met withsilence right we did a series ofmeetings with them probably 30 meetingsover the last 12 months where they askedus every question Under the Sun we kindof you know told them everything wecould about our business but we didn'treally get clarity from them about howwe could come in and register whichassets they had a concern with whythere's contradictory statements betweenthem and the cftc we didn't really getany feedback from them and suddenly wegot this Wells notice and then thecomplaint that was filed yesterday sowhat basically we're in this environmentof you know regulation by enforcement Idon't feel like there's a clear rulebook The only sort of high-levelstatements they've made is thateverything other than Bitcoin is asecurity which that's just that's justnot what it says in the law and by theway that would also kind of mean likethe end of the crypto industry in the USif that was actually the you know whathappened and so we have to go to courtto challenge that we're proud to do itfor the industry and for America butArmstrong’s decision to push ahead on adding tokens despite riskthis has been something that has beenhanging over the industry and coinbasefor a while the SEC is far back as theprevious administration Jay Clayton hadbeen saying things about hey some ofthese things are securities that arebeing traded out there the SEC haswritten papers about this you and yourS1 when you file to go public put downas a risk the SEC may decide that thestuff that we are trading is in fact asecurity and they're an onerous anddifficult registration obligations thatwe would have to do should the SECdecide this so it doesn't like this sortof came out of nowhere this wassomething that had been over theindustry for a while but you pushedahead anyway and built a business andgrew that business and added more tokensand added more assets tell us why youdid thatyeah well there are certainly cryptoSecurities out there in fact um coinbasehas reviewed you know well over athousand different assets ninety percentof them we've rejected right because wethought some of them could be Securitiesor they had other we had other concernsabout them so we've really only listed avery conservative small number of theassets out there and you know so I agreewith the statement there's a lot ofcrypto Securities out there in fact Iwould like there to be a robust healthymarket for people to trade cryptoSecurities in the US I think this is oneone more area where crypto could helpupdate the financial system aroundCapital formation and we should make iteasier for people to raise money fortheir company or for something they wantto build in the world and those shouldbe issued and registered as cryptoSecurities we filed a petition formallywith the SEC to try to get clarity abouthow that could happen we acquired abroker-deer license which is dormantbecause we haven't found a way toactivate it with the SEC so I would likethere to be a robust market for tradingcrypto Securitiesum the you know the 10 or less of assetsthat we've reviewed that we did decideto list we feel that those are cryptoCommodities and so so um they don't needto be registered and traded with underan SEC license let's back up a littlebit for people who are not so in theWeeds on the all the various minutiahere the SEC is alleged basically thatyou are running a foul the rules inthree ways that you're a broker dealerthat you are a Clearinghouse and thatyou were in exchange all three of thosethings the SEC requires that youregister and take a bunch of actions youaren't doing thatthere's no dispute that you are not anyof those things is that right or is theor is there any dispute that you'reacting as a broker dealer acting as aClearinghouse and acting as an exchangeuh no I mean well we don't claim to be abroker dealer orum you know we we've acquired a brokerto a license that's still dormantbecause they won't allow us to activateit but for the comma for the assets thatwe do trade those are Commodities sothey don't require those registrationsthey don't require the registrations butwe're not disputing what you do what youdois function as an exchange function as aClearinghouse and function as a brokerthe dispute is around whether what youare trading clearing and broking isindeed something that's under the sec'sjurisdiction right yeah we're trading onour exchange crypto Commodities today soHow Armstrong defines a securitylet's let's let's Zoom way out again forpeople who might not be deep into thethe minutia of this so the question ofwhat is a security you can think aboutit in a whole bunch of different waysand there's case law on this but like tozoom way out you've got like baseballcards at one end you've got Apple stockon the other end right baseball cardsclearly not a security we trade baseballcards they have value but nobody thinksthat like uh you know 1987 tops Darylstrawberry is a is a security Applestock clearly a security big gap betweenthose things Bitcoin looks like it'smore over here closer to a baseball cardand the SEC is making arguments that abunch of things that you trade oncoinbase are more over here closer toApple that their company-like thingstheir companies that work on theseprotocols that issue these coins theyissue the coins they to people whoexpect that they get a profit from thosecoins how do you think about thatdistinctionright okay so I'll just clarify up fronthere I'm not a lawyer right so I'm goingto do my best to get to touch on thisbut you have had a lot of time and andhave had to do a lot of thinking aboutthis topic sure this is a deeplytechnical Topic in the law and I'll tellyou my interpretation of it in a secondbutum it's worth noting that you know inthe in the United States we have aSecurities regulator the SEC we alsohave a Commodities regulator and sopartly this is a major topic of debatein the US is like which one is it youknow it's um but in other countries likein in the UK for instance they just haveone Financial regulator for both andit's funny they spend like one percentof their time even discussing this issueas some sort of like kind of wonky youknow interesting topic but it's it's amassive issue in the US just because wehave two separate Federal regulators andthere's kind of like a turf or politicalyou know power sort of battle happeningwhich we feel like we're caught in themiddle of so anyway with that as abackdrop there is this thing called theHowie test right which which is thedefinition of a security and it kind ofsays you know is there an investment ofmoney a in a common Enterprise with anexpectation of profit based on theeffort of others so it has those kind offour prongs you can spend you know youcan twist yourself into knots kind oftying teasing it apart but the importantthing to know is that it all in all fourof those things have to be true right soyou can imagineum there are things that like youmentioned baseball cards there's otherthings that people invest in even withan expectation of profit like let's saya Picasso painting right that they hopeto make money on they hope it will go upin value but that's not a security rightbecause it's not um based on the effortsof others and so there's various waysthat you know you could imagineum a crypto asset would not be asecurity right if it's if it'ssufficiently decentralized there's nocommon Enterprise right if there's somespecific utility around it it's notspecifically it's not just for thepurpose of you know the value of goingup right and so what we need in theUnited States at this point to getregulatory Clarity unblock this issueget rid of the turf war is regulatoryClarity and I think what's going to haveto happen now since the cftc and the SEChave not been able to sort of you knowfigure this out is we're going to haveto have Congress step in and draftlegislation that will unblock this issuein the United States or we're going tohave to have the courts create more caselaw which is partly what we can do bygoing to court with the SEC here is it'sjust helping get case law created I'vebeen really pleasantly surprised to seethat there's now draft bills beingcreated in Congress Congress is veryvery aware this is an issue by the waythey're worried that the U.S is going tobe left behind because while this kindof back and forth fighting is happeningum you know the UK is Singapore HongKong like the UAE every Financial Hub inthe world is kind of saying hey we wantto be the future crypto web3 Hub and wehave clear rules you know Europe Europejust passed comprehensive cryptolegislation way ahead of the U.S sousually we think of ourselves as kind ofinnovative leaders around technology inthe US we're taking notes now fromEurope because we haven't gotten thisfigured out so let's I want to come toAre all of Coinbase’s listings crypto commodities?what the rules should be and what youthink they should be and how they shouldbe changed down the road in a second butI want to stay for a little bit on whatthe rules are now which is what we haveto deal with it's what the industry hasto deal with there are rules now therules are subject to interpretationobviously that you will you will be itsounds like you will be taking this tocourt pretty hard and there will be atrial and a discussion and a litigationabout what the rules are assume that'swhere you're going with this so underthose rules I'm going to pick out acouple of things that the SEC has saidthe SEC has said that there are 13tokens um that are cryptocurrenciescrypto assets or whatever you want tocall them that you are trading um theysay actually at least 13 but they name13 that they say are securities and theyprovide some detail for them and in acouple of those casesfrom reading the sec's complaint itlooks a lot like a company sellingstocks so they bring up the example ofSolana where there is a there was afundraising they sold these tokensinvestors bought the tokens they toldthe investors we're going to use themoney that you give us to grow anddevelop the platform we're going to hireEngineers we're going to build stuff andin return we're going to reduce thesupply of tokens so that the tokens thatyou hold become more valuable thatsounds a lot likeour company selling stock how is thatnot in your viewright so you're right the SEC complaintum sort of said of the over 200 assetson our platform we have a concern aboutthese 13. so it was a relatively smallpercentageum but to answer your question directlyso again if any of those four prongs ofthe Howie test are invalidated it maynot be a security right and again thisis something the courts would have tokind of really dig into but an exampleuh would be you know in the Solana caseright let's say that um if something hassufficiently been decentralized thatcould be an argument right but there arefounders of Solana there's a Solana Labsthere's a Solana entity there was afounder of Bitcoin too rightum you know maybe we don't know andethereum right so this is actually aninteresting um sort of nuanced Point umsome things could be a commodity fromday one other types of crypto assetsthey may start as a security becausethey're just raising money for a projectum that could you know could besomething in the future but then as thatproject launches and it decentralizesand it develops utility it may actuallyconvert to being a commodity at somepoint right this is actually animportant part of the law that's unclearright now and in for instance the draftbill that we saw come out of Congresslast week from McHenry and Thompson theystart to try to address this issue ofhow could it how and when would an assetthat started as a security become acommodity right so anyway there's a lotof details where in a moment in time youhave to look at it it could be differenta year laterum anyway with every asset we've listedon our platform we did extensivediligence we did a I think it was like a72-point legal analysis we rejected 90of the assets every asset we decided tolist we've we felt there was a strongargument that it was a commodity andthat's what we're going to go to courtto win on so you looked at thousands ora thousandtokens you listed 250 ish of them andthe SEC has a problem with 13 at least13 but they highlight 13. so but theissue is you have to bad a thousandright you can't have anySecurities you've got to have all 250that you trade can't be Securitiesotherwise you're running an unlicensedSecurities Exchange and an unlicensedClearinghouse and an unlicensed brokerso it seems like the the odds are kindof not in your favorso that's not really how I think of itremember we've been the goal of our thislawsuit is to get clarity for theindustry right and we've actually beenformally petitioning the SEC for Clearwell the goal the SEC the sec's goal isto stop you fromfrom breaking the law in their view it'snot I don't think they think thatthere's a lack of clarity in theindustry I think they think that you'rebreaking the lawwell that may be what they say but youknow I can assure you there's a hugelack of clarity I mean every startup inthe crypto space is spending hugeamounts of money on on legal you knowlawyers who basically tell them I don'tknow there's no case law we can't reallygive you a clear answer right and andthe SEC has really failed to kind ofpublish a clear set of guidance you knowyou saw you may have seen in front ofCongress you know Patrick McHenry askedthe chair just a very simple question onone asset you know is ethereum isethereum a security or commodity andover and over again he refused to answerI mean so even on some of the biggestassets they can't just give you a clearanswer but yeah going back to the priorpoint I I was going to make so you knowour goal with this court case is tobegin to get clarity for the industrynot just for us but for the wholeindustry for honestly for for America sothat it doesn't fall behind in this inthis areaum and so if we get any kind of clarityfrom the court regardless of the outcomehonestly I think it would be a step inthe right direction but I we feelstrongly all the ones that we listedthere since we took a prettyconservative approachthey are they are Commodities now in theCoinbase’s process of selecting which assets to listprocess of of assessing which should bewhich assets should be listed that wassomething that your company spent abunch of time on you participated insome of these discussions to describethe the process how does that work soactually there's a committee a digitalasset listing group that decides thisI'm actually not on that committee youdon't participate in those discussions II helped designum and give input on the process and howit was designed originally with withlawyers but I'm not actually one of thedecision makers on the listing processintentionallyum and so the thing that that thatcommittee does every asset that wereview we we look at a number of factorsso one of them is this legal analysisabout is it a commodity or security andwe've developed our own internalframework from that for that we'veshared that with the SEC we shared itwith them before we went public you knowthey've been well aware of it for manyyears we also look at the cyber securitykind ofum The credibility of the of the tokensome of these smart contracts could haveyou know issues that might harmcustomers and so we look at we do acyber security analysis we also do acompliance review of the asset in thefounding the founding teamSo based on that the the committee whichhas a diverse set of skills of differentpeople in finance and cyber and legaland all kinds of things they make thelisting decisions the SEC says in itsDid Coinbase become looser with standards?complaint that you rush that processthat that coinbase sort of startedcoinbase actually started fairlyconservatively with Bitcoin and with asmall much smaller set of tokens whileeverybody else in the space is goingwild listing a zillion things andtrading derivatives and all kinds ofcrazy stuff and you were prettyconservative but over time you listedmore and more and more and possibly letthe standards and let the analysis slipis that how do you respond to that wellwe've rejected over 90 percent of theassets we've reviewed so I think that'sa pretty that's a that's a good startand then I feel pretty comfortable aboutthe the analysis I think as the SEC goesin to look at it well it really has thecourt goes in to look at it because theSEC has already seen all of thisum I think they'll find it to be a veryrigorous analysis we have you knowbasically a stack of paper on everysingle asset we've ever decided to listand the irony of this is that we werecontinuously asking them during thisperiod can you give us more clarity thatlike that's how it's supposed to worklike the regulator publishes the rulesand then everybody has to follow themright so you have to remember that therewere no rules we couldn't really get anyfeedback from them aboutwas this asset okay was that not whyright and so with them sort ofabdicating that responsibility weessentially had to create our ownprocess and I think we did a really goodjob of that working with some of thebest legal Minds in the world and so Ithink it's it's pretty unfair and Ithink this is not a good fact patternfor them that a you know a jury or ajudge would look at is to say look thiscompany was formally petitioning you forclarity they met with you 30 timesthey developed their own internalframework working with the best lawyersin the worldand you never gave them any feedback onit and then you hit them with thisenforcement action that that's not fairand that's not good for America coinbasehas a venture arm that invests in tokensand other things does it invest inanything that's traded on the platformum I don't I don't know actually theexact I don't want to get I want to makesure I give you a specific answer but Ithink most of those have been juststandard Adventure investments in um instartups so that's not a factor in thelisting decisions is whether coinbasehas or doesn't have a position in thecompany or the Toca well we don't takeany listing fees and I yeah as far as Iknow on the digital asset listing groupthey don't look at our personal uhcoinbase Venture investment it's not afactor you talked about the rules andArmstrong’s thoughts on the Howie testthe clarity and what the rules should bewhat's wrong with the Howie test it'sbeen around for you know since 1946 itcovers a whole lot of things it startedwith orange groves but it covers stocksand all kinds of stuff and has beendeployed in a bunch of different placesand the original kind of idea of it wasfor it to be flexible is not supposed tobewe're going to make a a determinationabout this specific thing it's supposedto be flexible because the court knewthat Securities and trading would evolveover time what's wrong with it how doesit fail to account for the specificneeds of cryptoyeah so I think it's a great startingplace and we basically need case law tosort of help us understand some of thethe nuances of how this applies in acrypto environment so an example is thatum encrypt of many of these assets thereis no common Enterprise or CentralAuthority that would be responsible tosay for issuing disclosures or somethinglike that like the ethereum networkthere's not any one group that controlsit it's decentralized rightum and so we actually uh we put out thispetition to the SEC people can Google itif they wantum you know just I think it's coinbasepetition to the SEC you can kind of readit we actually a lot of these are reallytechnical legal questions but there'sabout 40 different areas where we feltlike the law the current law was alittle unclear on this likeum you know decentralization utilitywhat does that mean in Context of OpenSource software right who would issuethe disclosures if there was a ifthere's not a common Enterprise rightum so there's a lot of open questionslike that which we don't feel are havebeen answered and that's the kind ofclarity do you think that there there isa role for those disclosures for thatkind of information to investors becauseright now there isn't right there isn'tany disclosure aboutany of these tokens besides white papersand other stuffum certainly not standardized disclosuredo you think there should be somedisclosure leaving aside who does it orhow it happens yeah so for cryptoSecurities absolutely there should bethe normal set of disclosuresum even for some of these things whichmay be classified as Commodities I thinkdisclosures are could be an importantpart of that and actually one of thenice things about crypto is that you canactually go look at a lot of this dataon chain it's public there's a couplecompanies that are trying to find waysto sort of better aggregate it and sortof say okay here's the distribution ofall the people who own it how long havethey owned it you know what price didthey buy it at are they insiders or arethey you know just third parties youknow and trying to get better insightsso anyway I think that kind of thing isis really important and again it needsto be updated for this new technologywhich is a little different than what'scome before it sounds like what we'reThe line between commodities and securitiestalking about here though is a questionof degree right so there are some backto the sort of baseball card and applething there's a big hazy middle thereand you the SEC would like to put theline here and you'd like to put the linesomewhere to the right of where the SECwants to put the line but fundamentallyyou're still thinking about thedistinction between Commodities whichare okay to trade in the way that youtrade them and securities whichshouldn't be it's just a question ofwhere the line should be is that rightyeah I mean I think this is what thecourts and Congress need to figure outis where should that line be andhonestly you know reasonable peoplecould disagree there's probablysomewhere there you know ultimately ourgoal is we'd like to be we're alreadylicensed by the cftc but and we have thedormant license from the SEC we we wouldlike to be in a world where we're justlicensed and regulated by both and it'sa healthy Market structure and you knowmaybe some of these assets would startas a security and they'd migrate theMcHenry Thompson bill that kind of cameout last week contemplates this idea ofyou know maybe we could actually haveone exchange where both Commodities andsecurities and stable coins and by theway you know there's other things incrypto too artwork and identity and allkinds of things so these could all kindof Coexist on a regulated platform andso if you you do have a new technologythat comes along it doesn't quite looklike A or B it's some kind of hybrid youknow that's probably why we need newlegislation so if the line gets drawnhere and my hand is is meant to be inbetween Bitcoin and ether over here andeverything else over here yeah ifBitcoin and ether are the onlycommoditiesis coinbase a viable business can youjust can you just say you know whatforget about all the rest of it we'rejust going to trade Bitcoin and etherthat's the businesswell first of all I think that would bea pretty extreme position and that's notwhat the rest of the world includingEurope and the UK and Singapore and HongKong have done solet's put that aside for a minute Idon't think that's that's actually Idon't think that's what the law sayseither butum so Bitcoin and ethereum are themajority of our Revenue todayum in the trading world right now wealso make quite a bit of Revenue almost50 of our revenue is from non-tradingfees rightum and then we also have Revenue outsideof the United States right soumI guess even in that scenario yes it'swe're a viable business and there's lotsof things but I also think that's justnot what's going to happen becausethat's not that's not what whereCongress is headed that's not what thecourts will decide you are unusual amongWill Coinbase ever go to the rest of the world?other crypto exchanges in that 84 ofyour revenue is in the United States andmost of the rest of them eitherare not in the United States or say theyare not in the United Statesum is there some Universe in whichcoinbase also and bittrex did this theywhen they were sued by the SEC said youknow what we're going to give up the USand go to the rest of the world is theresome Universe in which coinbase gives upon the U.Sno I mean we're we're here to stay we Icreated this company in the UnitedStates because I believe it's a bigMarket but there's also there's rule oflaw you know and there's a willingnessto generally do the right thing even ifit takes a few iterations so we aregoing to continue to be in the US we'regoing to be the leader in the U.S uh theU.S is going to get to the right outcomewhether it's through the courts Congressum you know the cftc something somethingis going to come to fruition or maybethe 2024 elections will change this youknow America has a way of healing rightlike you know if the winds blow this wayand then four to eight years later theykind of blow the other way andeventually we get to the right outcomeeven if it takes a while at the sametime while we're going to be the leaderin the U.S we also we're going to be amultinational we're going to be we haveentities in all the major Financial hubsum or many of them at this point and Iwant to be an American company that hasa global footprint the SEC also suedbinance this week of courseum those are cases are similar but alsodifferent in in important ways tell ushow you see your case versus binance'scase and whether there's theircommonalities there are places where youand they would be sort of fighting thesame fight with the SEC in places wheretheir differences yeah so um I thinkthey're actually very different and youknow it was kind of unfortunate thatthey were done back to back and my guessis that might have been deliberate totry to conflate the issueum but you know just to give you someexamples I mean I I don't want to sayanything about any other companies inthe space but I'll just talk aboutcoinbaseum you know so there were no allegationsin our complaint about misappropriationof customer funds or wash tradingum you know there was there was nonaming of me or the executive teampersonallyum there it really was just a questionon this technical matter of like youknow are these Securities or Commoditiesand I guess it's also important to noteas you said earlier too I mean coinbaseis based in the US we're a publiccompany so that means we have strictrequirements around for for instancelike audited financial statements sowhen we say that customer funds aresegregated and they're backed one to oneyou know you don't have to take our wordfor it our external big four auditingfirm is is looking at that you you haveArmstrong’s relationship with the SEC chairmantaken I think it's fair to say areasonably confrontational approach forthe SEC there's some there's a Twitterthread in which you said some sketchything things going on do you regret thatapproach well I wouldn't say ourapproach has been confrontational it iswith great you know we've never relishedthe opportunity or the idea of likeending up in litigation with ourregulator in fact quite the opposite Imean we spentum 30 meetings over the last year tryingto be as helpful and collaborative as wecould and really got no feedback rightum we decided to become a public companywhich you know and shared all thisinformation with them so and and by theway you know I have a greater deal ofrespect forum the people at the SEC the staff theCommissioners I think our relationshipwith the chair has been quite difficulthonestly but there's a lot of reallygood people at the SEC and we've had noissue working with every other regulatorout there both in the US but alsointernationally why is the why is therelationship with chair Gensler beendifficultyou knowI don't know I don't want to speculateon his motives or or anything like thatbut um you know when I when he firstcame into the role I made an effort tokind of fly out there and go meet withhimI don't know why the schedules wouldn'talignum we made several attempts weeventually did get to meet but onlyvirtually over have you ever had aone-on-one meeting in person with himI've never been able to meet with him inperson which is which is rare um everyregulatorthat we have I've been able to getmeetings withum including the heads of government inmany of these countries where we operateit may have been a covid thing at thattime but it may have been other reasonstoo I don't know I I don't it doesn'tseem like uh he he wanted to meet withusArmstrong’s dream regulatory structure for cryptolet's let's talk a little bit about thefuture and what a different Universe forcrypto might look like you've you'vetalked a bunch about how crypto could behow the rules that are currently inplace the how we test and other thingscould be applied to crypto and the legalanalysis that will happen in the contextof this court case but you've alsotalked about talking with Congress andtalking and you alluded to a sort offuture future Administration after the2024 electionsumif if the political system were suchthat it would create a new set of rulesfor crypto and you could sort ofwhiteboard from zero on what those rulesmight look like without having to dealwith the existing frameworkbrainstorming in your headum what what is sort of BrianArmstrong's dream regulatory structurefor crypto well so the first one is wejust need to get some clarity about themarket structure and how you know thecftc and the SEC are both going toregulate this industry what are theboundariesum I think we also need to just bring insome basic consumer protections whichareyou know around wash trading preventionAML kycum you know having audited financialstatements these are just kind of bestpractices that can come over fromtraditional financial services and beapplied uh to crypto and then I think wealso need to get a little bit moreclarity about stable coins becausethat's been a really big use case and umarea of growth for crypto and so there'sstill a little bit of lack of claritythere about you know how issuance worksand and things like that so it's reallyit's actually not rocket science this isjust applying some of these really basicCommon Sense ideasum to the industry and then once we havethat legislation in place I think we'llstart to see some of the entrepreneurswho've left the US come back and sayokay I feel that we're not just going tobe attacked randomly or have incrediblyHigh legal bills at any given moment andwe can actually build a business here inthe US again