Cryptocurrency Firm Coinbase in Talks to Become SEC-Regulated Brokerage

Coinbase, a leading cryptocurrency firm, has approached U.S. regulators about registering as a licensed brokerage firm and electronic-trading venue, a move that comes as regulators have waged an aggressive campaign to supervise the fledgling industry.

The San Francisco-based startup, one of the world’s largest platforms for trading bitcoin and other cryptocurrencies, has met with Securities and Exchange Commission officials in recent weeks about registering its business with the agency, according to people familiar with the matter. The step would allow Coinbase to expand the group of assets it offers to include digital tokens that the SEC has argued are securities and could put pressure on other cryptocurrency trading venues to submit to U.S. oversight, the people said.

“It’s an early phase where the industry leaders understand they have to live within a highly regulated environment,” said Richard Levin, a partner at law firm Polsinelli PC who advises companies involved with digital currencies. “They have to deal with the SEC.”

A Coinbase spokesman declined to comment.

“The assets that we do list have all had some amount of regulatory certainty,” Coinbase President Asiff Hirji said on CNBC on Thursday. “As soon as there is more regulatory clarity than there currently is you would expect us to start listing more assets.”

Companies that operate online trading platforms for cryptocurrencies have positioned themselves as disrupters of traditional channels for raising capital and exchange trading. Trading in bitcoin and other virtual currencies that Coinbase offers, including Ethereum and Litecoin, is virtually untouched by U.S. market regulators.

But the growth of initial coin offerings—in which startups offer investors a token in exchange for an investment—has added a new opportunity that makes it harder for platforms to continue shunning regulation. SEC Chairman Jay Clayton has said that most tokens issued through ICOs are securities, meaning they can only be traded legally on a licensed exchange or electronic trading venue.

Businesses raised $4 billion during the first quarter through ICOs, more than half of the $6.5 billion raised in ICOs for all of 2017, according to Token Report.

The SEC has issued subpoenas or requests for information to dozens of companies that conducted ICOs, according to people familiar with the matter, as the regulator tries to sort out which deals evaded securities laws and which tokens may have a valid excuse from regulation.

The threat of a regulatory enforcement action has scared Coinbase and some other bitcoin-related firms from listing new tokens. But Coinbase announced in March that it planned to support tokens in the future, although it declined to disclose which assets it might add. The company has already launched a service for storing customer assets, a function that licensed brokerages often perform for clients.

Coinbase, whose backers include venture-capital firms Greylock Partners and Andreessen Horowitz, could seek a license from the SEC as an exchange, but registering as a broker-dealer is viewed as a less cumbersome step that would allow the company to move into markets the SEC regulates. Many broker-dealers operate licensed electronic trading systems, which are alternatives to exchanges that face less extensive regulation.

Still, the step would expose Coinbase to a new type of regulatory risk. The SEC can examine broker-dealers for compliance with the extensive array of rules that brokers face. SEC examiners could comb through the company’s trading records, the systems its uses to protect customers from cybersecurity threats, as well as its policies for defending against insider trading and market manipulation.

Coinbase faced manipulation-related allegations last year after the price of a bitcoin offshoot called Bitcoin Cash climbed in value before the platform began facilitating trades in the alternative currency. The company said it would investigate the matter.

As a broker, Coinbase’s platform would only be allowed to offer tokens that comply with securities laws. That would mean token issuers would have to register their sale with the SEC, providing investors with an extensive set of financial disclosures. Token issuers can avoid those disclosures if they limit the sale to institutions and millionaires, but investors in such private sales aren’t immediately allowed to sell the investments.

At least one other firm involved with virtual currency trading has registered with the SEC as a brokerage firm. Templum LLC operates a licensed brokerage firm and alternative trading system and plans to offer startups a platform for selling regulated tokens as well as a market for trading them. Templum has asked the SEC to allow tokens that were issued and traded illegally to “remediate” their status by making the required filings with the SEC.

https://www.wsj.com/articles/cryptocurrency-firm-coinbase-in-talks-to-become-sec-regulated-brokerage-1523043315