Coinbase’s Letter to SEC Explained: Why Core Pledge Services Are Not Securities

On March 21st, Paul Grewal, Chief Legal Officer of Coinbase, said on Twitter that today, Coinbase submitted a comment letter to our July 2022 SEC rulemaking petition. We explained why core pledge services are not securities issuance and asked the SEC to clarify the fact that core pledge services are not securities.

Coinbase CLO once again called on the SEC to clarify that pledge services are not securities, and to contact the public before law enforcement

Introduction

Coinbase, one of the world’s largest cryptocurrency exchanges, recently submitted a comment letter to the Securities and Exchange Commission (SEC) regarding its July 2022 rulemaking petition. The letter seeks to clarify that core pledge services are not securities issuance and asks the SEC to provide clear guidelines on this matter. In this article, we will explore what core pledge services are and why Coinbase is so invested in ensuring that they are not considered securities.

What are Core Pledge Services?

Core pledge services are a type of service provided by cryptocurrency exchanges like Coinbase. They allow their customers to earn interest on their digital assets by lending them to third-party borrowers. Essentially, users deposit their digital assets into a lending pool, and borrowers can then use those assets as collateral to secure loans. Lenders receive interest payments as compensation for lending out their assets.

Clarifying the Securities Issue

In Coinbase’s letter to the SEC, the company argues that core pledge services are not securities issuance. They explain that the service is not a type of investment contract because users retain ownership of their digital assets and are not investing in a common enterprise. Additionally, they point out that core pledge services are not intended to generate profits for users, but rather to provide a useful service.
Coinbase goes on to argue that its core pledge services are akin to other lending and borrowing services, such as those provided by banks or peer-to-peer lending platforms. These services are regulated, but are not considered securities. Coinbase believes that its core pledge services should be regulated in the same way.

Importance of the issue

The issue of whether core pledge services are securities or not is a critical one for cryptocurrency exchanges like Coinbase. If these services are deemed to be securities, then they would be subject to a range of securities laws and regulations. This could make it more challenging for exchanges to offer these services to customers and could significantly increase compliance costs.
Furthermore, if core pledge services are classified as securities, then it could set a precedent for other types of cryptocurrency services to be deemed securities as well. This could have far-reaching implications for the entire cryptocurrency ecosystem and could stifle innovation in the industry.

Conclusion

Coinbase’s letter to the SEC raises important questions about the regulatory framework for cryptocurrency exchanges and services. The company argues that core pledge services are not securities and should not be subject to the same regulations as securities. The SEC’s response to this letter will be closely watched by the industry, as it could have significant implications for the future of cryptocurrency.

FAQs

1. What are core pledge services?
Core pledge services are a type of service provided by cryptocurrency exchanges like Coinbase. They allow their customers to earn interest on their digital assets by lending them to third-party borrowers.
2. Why are core pledge services important?
The issue of whether core pledge services are securities or not is a critical one for cryptocurrency exchanges like Coinbase. If these services are deemed to be securities, then they would be subject to a range of securities laws and regulations.
3. What are the implications of classifying core pledge services as securities?
If core pledge services are classified as securities, then it could set a precedent for other types of cryptocurrency services to be deemed securities as well. This could have far-reaching implications for the entire cryptocurrency ecosystem and could stifle innovation in the industry.