Coinbase’s artful interpretation of vague rules

Coinbase Global, the largest crypto exchange in the U.S., has made the case that its review processes for potential listings ensure none on its platform are securities, while at the same time describing the underlying rules as fuzzy and in need of clarification.

Why it matters: Now reportedly facing a probe by the SEC about whether it does in fact offer securities for trade, it’s worth a look at the company’s entire listing process — one it has changed alongside the market’s and its own growth as it pursued CEO Brian Armstrong ‘s mission to list as many “legally viable” tokens as possible.

Flashback: Coinbase first published details about its process for adding new assets on Coinbase and GDAX, the exchange now known as Coinbase Pro, in March 2018.

  • The seven-step process first starts with an “internal asset selection committee” using Coinbase’s 2017 Digital Asset Framework to make initial recommendations of which new assets to add; links to the framework are now dead.
  • Assuming the asset passed the legal and risk review, the asset is reviewed by the Coinbase executive team for approval (which was clarified or changed later to express that the CEO and board members were not voting during the review).
  • Specific announcements about new listings were to be made both via the company blog and its Twitter handle.

Context: Coinbase in 2019 stated publicly that it aimed to list tokens representing at least 90% of the aggregate market capitalization of all digital assets in circulation.

  • Yes, but: “Looking at the data, if you were to calculate how many tokens make up 90% of the industry’s total market cap, it would be around 38 tokens,” Dustin Teander, senior research analyst at Messari, tells Axios.
  • The company today lists more than 200  supported cryptocurrencies.
  • There are tens and thousands of coins trading, but very few actually have a meaningful market share in market capitalization terms.

Reality check: A review of publicly available statements and disclosures over the last 18 months show how the company tweaked details of its listing procedures as it tried to balance priorities of growth and disclosure against the realities of the market and the risks of vague regulatory guidance.

  • Its modus operandi — to list a lot of tokens — has been directly at odds with what SEC Chairman Gary Gensler has said: That most crypto might be considered securities.
  • Coinbase said it could not immediately offer additional comment.

Here’s a timeline of relevant events:

Jan. 14, 2021—Coinbase launches “Asset Hub,” sending out an open invitation to coin issuers. “We are proud to offer distribution power for issuers to potentially reach our more than 35 million verified users,” the firm said.

  • The firm listed more than 40 digital assets at the time.

Jan. 18, 2022—Coinbase discontinues blog posts announcing new listings, but will continue to post via Twitter handle @CoinbaseAssets. By this time, Coinbase has listed roughly 140 digital assets or 3.5x more than what it had a year after it started Asset Hub.

Jan. 22, 2022—Coinbase in a “proof of alignment” blog post says neither CEO Brian Armstrong or Coinbase Global board members vote during its internal vetting process.

March 7, 2022—Coinbase rolls out its “experimental” label, one applied to relatively new or unknown coins.

  • At this point it lists more than 150 digital assets.

April 11, 2022—Coinbase says it’s increasing transparency with an “asset roadmap” of tokens up for listing consideration.

April 28, 2022—Coinbase says it will only list approved tokens, discontinuing the roadmap. Coinbase adds an update on its blog on July 21 with update on a DoJ investigation.

July 1, 2022—April 11 post is updated to say the April 28 decision to only list approved tokens applies.

July 21, 2022—Coinbase says it does not list securities, “end of story.”

The other side: Coinbase has been criticized by crypto-experts or snarks (depending on where you’re sitting) for its listing process.

  • Jordan Fish aka “Cobie”, who is known for sharing crypto wisdom via podcast Up Only, in a series of tweets in April, blasted Coinbase for considering “virtually completely dead” coins in its 50-coin “potentials” list.

The intrigue: The nine tokens that the SEC deemed securities in a recent insider trading case (separate from the larger probe), appear to have little in common (you can read more about what each does here) but each were announced on Coinbase’s blog, the practice it discontinued in January.

Crystal’s thought bubble: Perhaps it’s not about what the coins are, but how Coinbase went about listing them.