“I think we will see significant legislative action this year,” says the Coinbase CEO

Coinbase Head of Public Policy Faryar Shirzad joins Yahoo Finance Live to discuss Coinbase’s battle with the SEC amid crypto regulations, failing to meet the SEC’s Howey test guidelines, and the outlook for Coinbase.

Video transcription

RACHELLE AKUFFO: Cryptocurrencies resumed their rally on Friday, climbing above 26,000 for the second time this week for Bitcoin. Now, for more cryptocurrency and the road to regulation in the US, we welcome Yahoo Finance’s Jennifer Schonberger. Hello, Jennifer.

JENNIFER SCHONBERGER: Thank you, Rachelle. SEC Chairman Gary Gensler has repeatedly urged crypto firms to come in and register with the commission and comply with securities laws. Back in December, I asked Chairman Gensler why it has taken so long for crypto companies to be registered. Here’s what he had to say.

GARY GENSLER: It’s really on these entrepreneurs and business leaders in the crypto space. And that’s an area that’s grown up all over the world with a lot of commingling of client funds on their platforms, giving interest returns to their clients, and then trading against their clients and things like that.

JENNIFER SCHONBERGER: I put this to Coinbase’s Chief Policy Officer Faryar Shirzad and asked if Coinbase has attempted to register with the SEC and what their experience has been. We also talked about getting into compliance and upcoming crypto legislation. Here’s what he had to say.

FARYAR SHIRZAD: There is no way to register. We’ve tried and there’s just no way to do it. And in fact, we filed a petition with the SEC back in June where we summarized the specific issues that the agency needs to address in order for crypto platforms to come in and register. We think the opportunity to build a crypto securities market in the US is hugely exciting, but we’ve stayed away from it because there’s no path to registration and there’s just no way to do it.

JENNIFER SCHONBERGER: When you say there is no path to registration and you have filed a petition, has the SEC responded to you?

The story continues

FARYAR SHIRZAD: No, unfortunately they don’t. And you know, I know you’ve had the chair on. You’ve had other SEC officials on. I would encourage you to ask them. When they say come in and register, when they say download the document from the website, ask them, register as what? In what capacity? How is it that under the current rules you cannot trade tokenized instruments under a national exchange or an ATS?

Will the SEC address it somehow? There is a tremendous opportunity for the agency to engage in a public announcement and comment process where everyone, the agency, stakeholders, industry, everyone can come in and share their views and how we arrive at a path to create a crypto securities market in the United States. But until that happens, there’s just no way to get there.

JENNIFER SCHONBERGER: And you’ve tried to follow up. In other words, SEC Chairman Gensler said it’s on the exchanges. He says he wants to get crypto firms to comply this year. But when you’ve tried to follow up, you haven’t heard back. Is that correct?

FARYAR SHIRZAD: Well, we talked to all the regulators. So we talked to the CFTC, the state regulators, the Treasury Department, the CFTC. You name it– we talked to all of them, including the SEC. But when we asked specific questions, how do we get a path to registration, there is never an answer.

JENNIFER SCHONBERGER: Faryar, in an amicus brief that Coinbase filed on Monday, Coinbase says that the digital assets that are currently traded on your exchange are not securities that you want to talk to the SEC about, obviously, so that you can start trading securities. My question is, why is it that the assets currently traded on your exchange are not securities? Why don’t they meet the so-called Howey test that the SEC uses?

FARYAR SHIRZAD: Well, there’s a four-part test known as the Howey test, which is the best guide we have. So it’s about a 70-year-old Supreme Court decision that listed four factors that you would essentially use to determine whether a particular contract is an investment contract and therefore treated under 1933 and 1934 acts as a security and therefore requires SEC registration. So it’s quite complicated. But we review the four factors of the Howey test, apply them to each token. And if we feel it’s too close to the line, we just don’t list it.

JENNIFER SCHONBERGER: I want to ask you about the custody rule that the SEC has put forward in terms of extending it to crypto. You post a declaration that Coinbase is a qualified custodian. Has the SEC put its stamp of approval on it?

FARYAR SHIRZAD: Well, the SEC said — to its credit, actually — we’ve been asking for regulations in all kinds of aspects of crypto markets. This is an area that affects us where there were actually regulations. And so the agency released a proposed rule. And under the terms of the proposal that the agency released, it is clear that our custodian, CTCT, is an eligible custodian. And we are confident that once the rule is finalized, it will remain a qualified trustee. So we’re pretty good about that.

JENNIFER SCHONBERGER: Mm-hmm. And I want to ask you too, Coinbase CEO Brian Armstrong tweeted recently, he heard rumors that the SEC wants to get rid of crypto staking. I put that question to the SEC. The SEC says it regulates conduct, not industries. Of course we saw what happened to the Kraken. Are you hearing anything new from the SEC on the betting front?

FARYAR SHIRZAD: No. I mean, as with anything that comes out of the SEC, we have to analyze the information that’s available to try to connect the dots to see if there’s an element of what they’ve said that applies to us. We’ve looked at the Kraken settlement quite closely, compared to our own betting offering, and it’s very different.

Our betting offer is not a security. We essentially provide a review service to anyone who can bet on their own, if they choose, but instead asks us to do it for them. So we do the strike. The protocol determines what the return is and the terms of the staking event. We charge a fee, a transparent fee that is known in advance, on top of that. So we offer a service, a fee for our service. And it is far from a certainty. And we are very confident that if necessary, we will be able to defend it quite effectively.

JENNIFER SCHONBERGER: Of course, I know that you, along with the rest of the crypto industry, really want a new tailored set of rules from the Securities Exchange Commission for crypto. But the flip side of that would be legislation from Congress. Are you listening, are you talking to lawmakers on Capitol Hill right now about what we could see on the legislative front this year? Can we expect some sort of new regulation for crypto this year?

FARYAR SHIRZAD: I think we will see significant action on legislation this year. There at about the end of the last Congress, which ended last December, there were probably seven major important bills with bipartisan support in the House. The Senate, the Democrats, the Republicans, the Banking Committee, the Agriculture Committees, the House Finance Committees, all the relevant bodies, both sides of the aisle, both sides of the capitol, are very much of the opinion that we need regulation around crypto. for cryptocurrencies to create a federal-level spot market authority for crypto-securities to essentially encourage the SEC to provide the clarity it has not provided itself.

And then for stablecoins, that we expect from our conversations with policy makers that you will see significant action on legislation, starting almost immediately. Now the legislation is a difficult thing to achieve. But there is a lot of interest and motivation to start the process. And we think that’s quite exciting.

JENNIFER SCHONBERGER: And my thanks to Coinbase’s Head of Policy Faryar Shirzad for that interview. Now, separately, given all the fallout that we’re seeing from the bank failures and the issues around executive compensation and bonuses, Rachelle, I’m just getting some breaking news right now that the Biden administration is about to announce that they need Congress to draft legislation to strengthen their authorities on repayments and penalties for it. Ranking member of the House Financial Services Committee, Maxine Waters, is drafting a letter in response that she will be releasing soon that she is working on legislation to give the administration those powers. Back to you.

RACHELLE AKUFFO: Appreciate the latest news there. Jennifer Schonberger there for us.