The betting services offered by cryptocurrency exchange Coinbase are “fundamentally different” from those offered by its peer exchange Kraken – which recently came under fire from the United States securities regulator – according to Coinbase’s general counsel.
Paul Grewal, Coinbase’s chief legal officer, made the following comments in response to a shareholder question about its betting services during the Q&A session on the exchange’s fourth quarter results:
“The staking products we offer on Coinbase are fundamentally different from the income products described in the enforcement action against Kraken. Differences matter.”
The first difference Grewal highlighted was that Coinbase users retain ownership of their cryptocurrencies at all times.
In its user agreement last updated on December 15, 2022 Coinbase states that it only “facilitates[s] depositing these assets on your behalf” but may not replace any Ether (ETH) lost due to hacking – which refers to blockchain’s mechanism for punishing bad behavior by reducing validator tokens.
Grewal also suggested that another difference is that its customers have a “right of return”, while the firm cannot “simply choose not to pay any returns at all”.
He pointed to the exchange as a publicly traded company as another critical point of difference, allowing customers a “deeply transparent view of our finances.”
In comparison, the Securities and Exchange Commission (SEC) complaint about the Kraken they claimed that its users lost control of their tokens by offering them to Kraken’s staking program, and investors were offered “excessive returns untethered to any economic reality”, while Kraken could also pay “no returns at all”.
However, Grewal demanded again regulatory clarity of betting services in the US indicate that the SEC has outlined their expectations in court complaints rather than through clear regulations, noting:
“Rules clarifying these distinctions would provide very real clarity, and we think the public should not have to parse complaints in federal court to understand what the regulator expects.”
Related: Coinbase Beats Q4 Earnings Estimates Amid Declining Transaction Volume
In a February 13 tweet, Grewal said the bet itself is not a security transaction, using the analogy of harvesting oranges to clarify his position.
If I grow the oranges myself and harvest them myself, the oranges are not securities. If I grow my own oranges and harvest them with a supplier who charges me a fee, the oranges are still not securities.
— paulgrewal.eth (@iampaulgrewal) February 13, 2023
On the back of SEC Chairman Gary Gensler urging firms to register products with the regulator, Grewal said Coinbase has no problem registering products with the SEC where “appropriate,” but added:
“I think it’s fair to say that at this point in time, the path to registration for products and services that can qualify as securities has not been open, or at least easily or readily open.”
Coinbase is currently facing an SEC investigation into its products similar to the one that led to Kraken settling with the regulator for $30 million and being banned from offering betting services to its US clients.
However, Coinbase intends to fight back with CEO and co-founder Brian Armstrong suggesting the company would be willing to challenge the regulator and take the case to court.
Coinbase betting services are not securities. We are happy to defend this in court if necessary.https://t.co/GtTOz77YV3
— Brian Armstrong (@brian_armstrong) February 12, 2023