coinbase-news

Tl;Dr: Coinbase becomes the first major global crypto exchange to successfully register with the Dutch Central Bank (De Nederlandsche Bank — DNB), allowing us to offer our crypto products and services to the Dutch market.

By Nana Murugesan, Vice President, International and Business Development

Hoi, Nederland!

We are excited to announce that Coinbase has successfully registered with the Dutch Central Bank (De Nederlandsche Bank — DNB) as a crypto service provider. This registration will allow Coinbase to offer our full suite of retail, institutional, and ecosystem products to customers in the Netherlands. We are proud to be the first major global crypto exchange to receive DNB registration approval — a significant milestone in Coinbase’s continued international expansion.

Coinbase views regulation of the industry as an “enabler” for crypto’s growth, setting clear ground rules that will create an environment which encourages innovation and strengthens trust in the sector from both the public and policymakers.

“As part of Coinbase’s ambition to be the world’s most trusted and secure crypto platform, we have taken strides to work collaboratively with government, policymakers and regulators to shape the future in a responsible way. Coinbase prides itself on being a compliance-led business. The Netherlands is a critical international market for crypto, and I am really excited for Coinbase to bring the potential of the crypto economy to the market here,” said Nana Murugesan, Vice President, International and Business Development at Coinbase.

Coinbase serves customers across almost 40 European countries through dedicated hubs in Ireland, the UK, and Germany. Additional registrations or license applications are in progress in several major markets, in compliance with local regulations.

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Coinbase Europe Limited and Coinbase Custody International Ltd are listed in DNB’s public register as a crypto service provider. DNB supervises Coinbase Europe Limited and Coinbase Custody International Ltd in compliance with the Anti-Money Laundering and Anti-Terrorist Financing Act (Wet ter voorkoming van witwassen en financiering van terrorisme — Wwft) and the Sanctions Act (Sanctiewet 1977 — Sw). The crypto services of Coinbase are not subject to prudential supervision by DNB or conduct supervision by the AFM. This means that financial operational risks in respect of the crypto services are not monitored and there is no specific financial consumer protection.

Coinbase gains regulatory approval in the Netherlands 🇳🇱 was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Tl;dr: Coinbase is funding a lawsuit brought by six people challenging the US Treasury Department’s sanctions of the Tornado Cash smart contracts and asking the Court to remove them from the U.S. sanctions list. The lawsuit explains that OFAC exceeded its authority from Congress and the President in sanctioning open source technology, rather than sanctioning the bad actors who used it or the property of those bad actors.

By Paul Grewal, Chief Legal Officer

Today, Brian Armstrong shared why Coinbase is funding and supporting a challenge by six individuals (including two Coinbase employees) against the Treasury Department’s novel sanctions of open source software associated with Tornado Cash. I wanted to take a moment to share a little more detail about this legal action. At its core, this legal challenge is about how the Treasury Department exceeded the authority Congress and the President granted it in sanctioning open source technology, rather than sanctioning the bad actors who used it or the property of those bad actors. No one wants criminals to use crypto protocols, but blocking the technology entirely (which is what this sanction essentially does) is not what the people’s elected representatives authorized — especially when there are effective routes to more narrowly target bad actors. These sanctions represent a significant unauthorized expansion of OFAC’s authority, and they have harmed innocent people seeking to legitimately protect their privacy and security using this technology, as the stories of these six individuals make clear.

Tornado Cash Sanctions

On August 8, 2022, Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned Tornado Cash, an open source software project that uses smart contracts to allow users to send assets privately on the Ethereum network. As part of this action, OFAC added to its Specially Designated Nationals and Blocked Persons List (“SDN List”) Tornado Cash’s smart contracts, which are publicly available, open source tools that anyone can access to send assets from their private accounts and withdraw them to a different crypto address. Smart contracts are essentially code that is not controlled by any individual or group and is executed by the Ethereum network according to strict rules that cannot be modified.

While prior OFAC sanctions against individuals or entities sometimes listed crypto addresses owned or controlled by these bad actors, OFAC has never before sanctioned an open source technology like the Tornado Cash smart contracts. For example, when OFAC sanctioned the North Korean Lazarus Group, it added eight Ethereum addresses to the sanctions list — each were accounts controlled by the Group where they held their assets.

In this case, by adding the Tornado Cash smart contracts to its SDN List, OFAC made it illegal for any U.S. person to use this privacy protocol — banning this technology for all.

OFAC Exceeded Its Authority From Congress and the President in Sanctioning Open Source Technology

Federal agencies, like the Treasury Department, ultimately get their authority to act from the people’s representatives in Congress, which enacts legislation defining an agency’s powers. When operating, federal agencies must act within the bounds of that Congressionally defined authority. If an agency’s action exceeds those powers, Congress has also authorized courts to review that action, with the remedy being to set aside the unlawful action. These challenges are critical to preventing executive overreach and ensuring agency action stays within the bounds of what the people’s representatives in Congress allowed.

Applying these principles here, Congress passed the International Emergency Economic Powers Act (“IEEPA”), authorizing the President to freeze the assets of, and prohibit transactions with, any person determined to be a threat to the United States, and the President delegated this power to Treasury to issue sanctions. However, this delegated power only authorizes OFAC to target persons or their property.*

We are supporting the legal challenge to the Tornado Cash action because the Tornado Cash smart contracts are neither person nor property. This means OFAC exceeded its authority from Congress when it recently added these to the SDN List — effectively banning the technology for all U.S. persons. The outcome sought by this challenge is to have OFAC remove these crypto addresses associated with software from its SDN List, so that U.S. persons can once again use this privacy technology.

First, at the risk of stating the obvious, Tornado Cash open source smart contracts are not persons. They are lines of code, not humans, corporations, or organizations. Tornado Cash’s smart contracts enable a user to deposit tokens from one crypto address and later withdraw those same tokens to a different crypto address, and are executed automatically without human intervention. They are a privacy tool, a technology, that is neither human nor an entity.

Second, and for similar reasons, the Tornado Cash smart contracts are also not property. The ordinary meaning of “property” is something owned, a possession, or a tangible or intangible item that someone has legal title to possess.** The smart contracts are non-proprietary, open source code not controlled by any individual or group. Instead, they are simply programs that run on the Ethereum network according to preset rules that cannot be changed or altered. In the case of the Tornado Cash smart contracts, anyone in the world can send ETH to these contracts, which will then run according to preset instructions that neither the original developers of the code nor those sending or receiving funds can change. When an individual uses these smart contracts, they never turn over control of their assets to another individual or group and assets are not commingled or mixed; they simply use the privacy code to send and then withdraw their assets.

These Novel Sanctions Harmed Innocent Individuals and Threaten the Critical Development of Crypto Privacy Protocols

Unlike in traditional finance, ETH transactions are transparently recorded on the Ethereum blockchain. That means anyone with a computer can view the transaction history and balances associated with a particular user’s address. So, when users send ETH from their address to a recipient’s address, anyone can use a public blockchain explorer to look up that sender’s prior transactions, learn about their spending habits, and check their account balance.

While this transparency is important for auditability and verification, it poses privacy challenges for Ethereum users who reasonably want to protect their personal financial information. For the same reasons that you’d be reluctant to publicly share all your private bank statements that detail your spending history, a person who receives their salary in ETH does not necessarily want everyone knowing how much they make or how they spend their funds.

The Tornado Cash privacy protocol allowed users to regain that privacy. Using smart contracts, a user could deposit assets from one crypto address and withdraw crypto assets to a completely different address, severing the otherwise clear connection to their prior transactions. Once withdrawn, the user could transfer those assets without fear of exposing their entire financial history or net worth to third party strangers. The plaintiffs in this lawsuit represent a cross section of crypto users and developers who used Tornado Cash to protect their privacy and security for various legitimate reasons — from wanting to safely donate to Ukraine war relief without risk of Russian retaliation, to concealing salary deposits that would show how much they earn, to preventing malicious actors from targeting their homes to try to steal large quantities of crypto assets held in their wallets. By creating new, private crypto addresses when sending funds to strangers, these plaintiffs could avoid disclosing their personal accounts, which they use to hold their assets and send personal transactions.

In this way, crypto privacy protocols are not only critical to the development of the crypto ecosystem, they are an important tool to protect individuals against hackers and thieves who may otherwise target owners of crypto addresses that hold significant assets. The sanctions against Tornado Cash have not only blocked this open source technology to U.S. persons, but cryptographers and developers have also been scared away from contributing to other important privacy projects, fearful that their code will be sanctioned in the future.

Coinbase is Committed to Combating Illicit Finance and Supports Reasonable Regulations and Action Against Bad Actors

Coinbase is fully committed to combating illicit activity and sanctions evasion. We regularly partner with and advise law enforcement and regulators on a range of cryptocurrency topics, support critical law enforcement investigations, and respond to many thousands of subpoenas a year. We fully support OFAC’s overarching national security objectives and greatly appreciate the important work it does to sanction bad actors and block the property those actors control. However, in the Tornado Cash action, OFAC did not target the bad actors or the property controlled by those actors; instead, it took the unprecedented step of sanctioning open source technology — a tool legitimately used by many innocent people even if also by some bad actors. We do not believe Congress authorized this, and for good reason. After all, we do not shut down email or the internet code because among its many users are some criminals. That is why we are funding and supporting this challenge by six crypto users seeking to regain critical tools needed to protect their privacy and security.

*50 U.S.C. § 1702(a)(1)(B).
**American Heritage Dictionary of the English Language 1412.

Sanctions Should Target Bad Actors. Not Technology. was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Tl;dr: Coinbase is funding a lawsuit brought by six people challenging the U.S. Treasury Department’s sanctions of the Tornado Cash smart contracts and asking the Court to remove them from the U.S. sanctions list. The sanctions exceed Treasury’s authority, harm innocent people, remove privacy and security options for crypto users, and stifle innovation.

By Brian Armstrong, CEO

Today we’re announcing that Coinbase is funding a lawsuit brought by six people challenging the United States Treasury Department’s sanctions of the Tornado Cash smart contracts and asking the Court to remove them from the U.S. sanctions list.

Tornado Cash is an open source piece of software running on the Ethereum blockchain that preserves privacy by allowing users to deposit assets from one crypto address and withdraw them using a different crypto address.

Last month, Treasury sanctioned the Tornado Cash software because it was being used by criminals — including North Korean hackers. We have no issue with the Treasury sanctioning bad actors and we take a hard stance against unlawful behavior. But in this case, Treasury went much further and took the unprecedented step of sanctioning an entire technology instead of specific individuals. The problem here is twofold: (1) there are legitimate applications for this type of technology and as a result of these sanctions, many innocent users now have their funds trapped and have lost access to a critical privacy tool, and (2) we believe the Treasury exceeded its authority, given by Congress, by sanctioning a technology.

At Coinbase, we’ve been fighting illicit activity since the very beginning, and while we share Treasury’s commitment to fighting crime, we believe this action harms innocent people and threatens the future of decentralized finance (DeFi) and web3 specifically.

Treasury used a hammer instead of a scalpel

The nature of the blockchain — where every transaction is public — makes crypto more secure. But it can also create privacy concerns. If you receive your salary in crypto, for example, you might not want the world to know how much money you make, or how you choose to spend it.

That’s why the individuals we’re supporting in this case used Tornado Cash in the first place:

• One person used Tornado Cash to anonymously donate money to Ukraine. Afterwards, his wallet received potentially malicious air drops. But because he anonymized his crypto before donating, he avoided attacks against his personal accounts. He has funds trapped in Tornado Cash.
• Another person is an early crypto adopter with a large online presence and a public ENS name linked to his Twitter profile. He used Tornado Cash to protect his personal security while transacting. Now he also has funds trapped in Tornado Cash.
• A third person operates an Etherum staking business. At one point, a stranger working near where he engages in staking asked how much money he was earning. He started using Tornado Cash to protect his assets and his personal safety.

Sanctioning open source software is like permanently shutting down a highway because robbers used it to flee a crime scene. It’s not the best way to solve a problem. It ends up punishing people who did nothing wrong and results in people having less privacy and security.

We believe law abiding citizens have a right to privacy, especially with some of their most sensitive data: their finances.

Treasury acted outside its authority

The second problem is that, while Treasury is allowed to sanction people (along with their property), Congress never gave it the power to sanction open source software. That’s why these plaintiffs are going to court to ask that this software be removed from the U.S. sanctions list. You can read more about our legal argument here.

This will stifle innovation

Finally, sanctioning open-source code has a chilling effect on innovation.

Right now, developers are worried that they could be held responsible for something they had nothing to do with, and no ability to control. At a time when we should be encouraging innovation, this kind of fear and uncertainty will do the opposite — making developers wonder if, by pushing the industry forward, they could be putting themselves at risk.

As one of the largest companies in crypto, we have a responsibility to defend the crypto industry against actions that go too far, and treat crypto on an uneven playing field. It’s not enough to just say we disagree and sit on the sidelines. That’s why we’re funding and supporting this lawsuit.

We will fully comply with the law while we await the court’s decision. But we’re hopeful that these sanctions will be reversed, allowing innocent crypto users to regain access to their funds and making it possible for anyone to use privacy tools to protect themselves.

Defending Privacy in Crypto was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

tl;dr How we protect personal information while complying with existing laws and regulations.

Recently, we’ve received questions about why we occasionally review specific accounts and ask for more detailed personal information about the owners of those accounts. In short, we do this to meet our regulatory obligations. Here’s a more detailed explanation:

At Coinbase, we strive to be the most trusted platform for buying, selling, and exchanging digital assets. Trust is the best way to help more people participate in the cryptoeconomy and reach our goal of increasing economic freedom around the world.

Earning and maintaining trust requires us to ensure the integrity of all transactions supported by our platform. And an important part of doing that is abiding by relevant laws and regulations. We’ve always believed that for crypto to gain the legitimacy needed for mainstream adoption, compliance can’t be an afterthought — it is core to the way we operate.

In practice, this means following laws and regulations in different jurisdictions, some of which are more stringent than others.

Crypto is a highly regulated market, with various parts of it overseen by many different federal regulatory agencies, individual states and others — and that’s just in the U.S. If we want to offer Coinbase services in other countries, we also have to comply with local regulations. In some cases, this includes the Travel Rule, which requires companies like Coinbase to exchange information about the participants in crypto transactions under certain circumstances.

Over time, the advantages of web3 may allow people to create and own centralized identities, sharing much less information with third parties and keeping that information more secure. We’re also excited about advances in digital identity which may move us away from reliance on traditional forms of identification, like driver’s licenses and other paper documents. But for now, companies like Coinbase are required to follow existing regulations, some of which have been on the books since before the Internet even existed.

This means we have to ask our customers for basic information about themselves and their businesses. Sometimes, and for a very small percentage of our customer base, we need much more detailed information. This helps us to comply with “Know Your Customer” regulations and keep Coinbase and the cryptoeconomy safe. No matter what, we are committed to protecting our customers’ privacy and providing a smooth and intuitive customer experience.

As part of our ongoing efforts to keep our customers safe, we’ve also organized a coalition to help other companies comply with global regulations, following industry leading safeguards to protect customers’ privacy and security. To join this coalition, and receive Travel Rule information, all participants must meet anti-money laundering, security, and privacy requirements.

We’ve also developed proprietary blockchain analytics capabilities to help secure the crypto economy from bad actors. And we have ongoing dialogues with policymakers globally where we advocate for consistent and reasonable requirements that protect our customers’ privacy.

While some within the digital currency industry have questioned the application of more traditional Know Your Customer (“KYC”) requirements in this novel space, widespread adoption of crypto will depend on building and maintaining the trust and integrity of the ecosystem. For crypto to succeed, people need to be able to buy digital currency with common payment methods, and feel safe doing so. The only way that can happen is if companies like Coinbase follow local laws and regulations, while partnering with policymakers to guide the next generation of rulemaking in this space. Put simply, if we want crypto to be widely accepted, compliance can’t be optional.

That’s why we’ll keep working to be an industry leader in compliance — protecting our customers, preserving trust, and building the cryptoeconomy.

Compliance and Protecting Personal Information was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

Coinbase is pleased to share the addition of PayPal to the Travel Rule Universal Solution Technology (TRUST) network. TRUST is a global, industry-driven solution designed to increase compliance with a requirement known as the Travel Rule while prioritizing the security and privacy of customers.

PayPal has been a leader in digital payments for more than 20 years by leveraging technology to make financial services and commerce more convenient, affordable, and secure for more than 400 million consumers and merchants around the world.

By joining TRUST, companies become part of a rapidly growing coalition from around the world. Since TRUST launched last February, it has already expanded to include 38 members, including: Amber Group, Anchorage Digital, Balance, Binance.US, bitFlyer, BitGo, Bittrex, BlockFi, BlocPal, Cake DeFi, Circle, Coinbase, Coinhako, Coinsmart, Coinsquare, Crypto.com, Custodia, Fidelity Digital Assetsˢᵐ, Gemini, Kraken, Netcoins, Nexo, Paxos, PayPal, Prime Trust, Robinhood, sFOX, Shakepay, Standard Custody & Trust, Symbridge, Tetra Trust, TradeStation, Unbanked, VirgoCX, Voyager, Wealthsimple, Zero Hash, and Zodia Custody.

The addition of PayPal marks another milestone in TRUST’s journey to become the global, industry-standard solution for Travel Rule compliance.

For more information about how TRUST prioritizes customer privacy and security while providing top-tier Travel Rule compliance, or if you are interested in joining TRUST, please contact us.

PayPal joins the TRUST Travel Rule Solution was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.

TL;DR:

• Coinbase filed a petition asking the SEC to begin rulemaking on digital asset securities.
• The existing rules for securities just do not work for digital assets.
• Our petition calls on the SEC to develop a workable regulatory framework for digital asset securities guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.

By Faryar Shirzad, Chief Policy Officer

Today, there is a robust crypto market in the U.S. That market includes thousands of different digital assets, crypto companies, and decentralized financial products, and is regulated at every level of government, including by multiple federal agencies in the United States. Yet despite the growth that has happened in recent years, close examination reveals a glaring deficiency in this market. Even with billions of dollars invested toward crypto innovation, and the passage of more than 13 years since the introduction of Bitcoin, there is still no meaningful crypto securities market in the United States.

Many factors can positively influence how a given market develops, but when it comes to crypto securities there is a significant, foundational hurdle that has prevented that market from maturing. That hurdle is the fact that the securities rules simply do not work for digitally native instruments. They don’t work for tokenized debt. They don’t work for tokenized equity. They don’t work for crypto. And that’s a major problem.

The consequence is that the United States is falling behind in digital asset innovation. Most of the digital assets traded today have the characteristics of commodities, and in many instances, were specifically designed to avoid the securities laws. In other words, as the crypto market develops, it is deliberately steering clear of the securities market — one of the principal financial markets in the United States. At Coinbase, we believe that digital asset innovation offers a number of profound, market-enhancing benefits — like real time settlement, the ability to trade safely without needing to go through costly intermediaries, and a transparent record of all transactions. But the full weight of those benefits will not come to pass if they are excluded from a market as big and impactful as the securities market.

Crypto assets that are securities need an updated rulebook to help guide safe and efficient practices. Crypto assets that are not securities need the certainty of being outside those rules. Anything short of that will have the effect of entrenching incumbent technologies at the expense of innovation and ultimately, consumers. That’s why we have submitted a petition to the SEC to request that it develop rules that work for digital asset securities. Here’s a little more on the problem as we see it, and how we hope to work toward a solution:

The Problem

Modern securities law was put into place by the Securities Act of 1933 and the Securities Exchange Act of 1934. The most well-known securities are stocks and bonds, but most other assets that are considered securities are classified as such because they are “investment contracts” or “notes.” The Supreme Court set forth how to determine whether an asset is an investment contract or note in SEC v. W.J. Howey Co. and Reves v. Ernst & Young. The former case created a test for determining whether an asset is an investment contract; the latter created a test for determining whether an asset is a note. These tests play a large role today in evaluating whether a crypto asset is a security.

It is often difficult to determine what a jurist was thinking when they drafted a given piece of law, but I think it is reasonable to assume that none of the authors who drafted these securities statutes from the 1930’s, or the subsequent Supreme Court tests interpreting those statutes, did so while thinking of a day when a decentralized, cryptographically-based, automated financial instrument would be adopted en masse by a millions of people in the United States and around the world.

Put simply — when these authors were writing rules to regulate square pegs, they did not account for how those rules would impact the unpredictable round holes of the future.

Securities law is thus not well-suited to govern digital assets. Attempted application of such ill-fitting laws to crypto creates a number of problems, including:

• Lack of regulation for the subset of crypto assets that are securities;
• So many different steps and intermediaries that there is no way trades can settle in real time;
• It is effectively impossible for individual investors to trade directly, without using a broker; and
• Blockchain technology is not able, under the current rules, to be used as a reliable record of transactions, even though this is the innovation that makes distributed leverage technology so powerful.

The SEC has thus far been unwilling to write new rules for crypto securities. Instead, the Commission recently announced that it will double the size of the enforcement unit that handles crypto and cyber cases. This enforcement-first approach has stifled development of the crypto securities market and prevents entrepreneurs from using crypto to raise money for their companies. It also prevents investors from using crypto to invest in those ventures.

Perhaps worst of all, the SEC’s approach has created enormous risk for investors. We saw this in vivid detail when the Commission brought an enforcement action against Ripple, after years of taking no action against them, claiming that XRP is a security. The value of XRP dropped immediately, costing investors huge sums of money. The XRP case is especially notable because there was disagreement even within the federal government about whether XRP was a security or not: FinCEN had determined it was not a security, and then the SEC said that it was.

If the SEC were to write rules permitting the tokenization of securities, the opportunities for innovation would be significant. The crypto markets could be expanded to offer crypto securities, subject to SEC regulation and governance, thereby giving investors new ways to invest in crypto. And opening debt and equity securities to tokenization would promote efficiency and resiliency in traditional markets.

But the SEC has not done this.

While the SEC has refused to develop new rules for digital asset securities, several governments and other organizations around the world are well on their way to new, workable crypto rules. The list is significant, and includes the European Union, United Kingdom, Singapore, Japan, Hong Kong, Australia, and Brazil. Action taken last month by the EU on their Markets in Crypto Assets (MiCA) regulation, for example, demonstrates the world’s largest economy — made up of 27 different countries — putting in place a clear, comprehensive set of rules for crypto.

We believe the SEC should follow the lead of these jurisdictions by helping to develop a robust and vibrant crypto securities market, with all of the excellent protections that investors have come to expect from American financial markets. That is why we filed our petition with the SEC that requests such a rulemaking to take place.

Coming Up With a Solution

With this petition, we are asking the SEC to start a process where the public and key stakeholders can transparently provide input into the agency’s work on crypto. We also hope the petition will launch a broader conversation where members of Congress — many of whom also see the need for the regulations to evolve — will provide their views. Doing this right will help to avoid one-off, arbitrary decisions that provide little clarity or guidance to the industry, and will instead result in a clear set of comprehensive rules, much like important jurisdictions around the world are working toward.

Coming up with such comprehensive rules will require a genuine examination of how crypto works differently from traditional financial securities and what provisions would actually protect investors who trade in crypto securities.

That examination should look at current crypto trading. Crypto trades differently from securities in a number of ways, and these differences must be weighed when writing rules for crypto securities. Consider:

• Traditional financial exchanges like the New York Stock Exchange and NASDAQ have set trading hours, but crypto trades 24/7/365.
• While traditional financial exchanges require that investors trade through the services of a broker, crypto lets you buy, sell, and trade assets directly, without going through an intermediary.
• Finally, traditional securities exchanges only trade securities; they do not trade commodities or any other type of assets. Crypto investors seek to trade across types of tokens — buying stablecoins to store value, and then buying other crypto with those stablecoins, for example — all on one platform. This kind of trading is not recognized under existing rules for securities exchanges, but could offer tremendous capital efficiency gains.

Another way crypto is different from stock exchanges has to do with custody — or how securities have to be held and kept safe by brokers and exchanges.

Traditional securities transactions are permitted up to two days to settle. This delay is designed to accommodate trades going through a number of intermediaries before the securities are finally in the hands of the buyer, and the cash with the seller. Using existing technology, these intermediaries are needed to help make sure a trade goes through as promised. The buyer must actually pay the money, the seller must actually give up the assets, the trade must be properly recorded, and there must not be any errors or unauthorized actions. The broker also has to hold the securities in a certain way to ensure that it has “possession” and “control” over the assets. These rules ensure that the broker keeps the customer assets safely, and also ensures that the broker completes customer trades appropriately.

This system of intermediaries, and the specific custody rules governing them, fail to leverage the benefit of blockchain technology and do not work for crypto:

• First, crypto investors expect trades to happen within seconds — one of the key innovations of crypto. But the current rules have too many steps to allow for immediate settlement.
• Second, in order for trades to happen that fast, the securities and the money have to be held by the exchange so the exchange can effect the transaction as soon as it happens. But a crypto exchange cannot custody assets the same way that a broker can and still effect an immediate trade.
• Finally, the rules for how to keep assets safe — to show possession and control — are based on how you would keep a stock or bond safe, not how you might hold a private key for crypto securities.

Let’s Work Together on This Solution

Coinbase believes that effective regulation benefits everyone — buyers, sellers, exchanges, and the U.S. financial system. The SEC has a long history of creating and enforcing regulations that have enabled the development of deep, liquid, and transparent capital markets in the U.S. These markets have, in turn, fueled incredible innovation and helped entrepreneurs build companies that have transformed the lives of billions of people.

Thankfully, the SEC won’t have to start from scratch when figuring out how to move forward. We laid out the questions that we think the Commission should be asking stakeholders and itself in determining the right path forward — our petition was written with the input of some of the best securities lawyers and economists in the country. If the Commission starts an open process where all of us can provide input, we look forward to sharing our thoughts on how to answer the important questions our petition raises, and we would encourage others to do the same. We may not agree every step of the way, but it’s critical that this is an open and transparent process, where the public has a chance to offer their views. Policymaking at this level is far too important to be made in a black box.

Crypto represents the next wave of innovation within the markets themselves — and whatever country encourages that innovation while also keeping investors safe will reap enormous benefits. We need the SEC to once again write the rules that will unleash the potential of U.S. capital markets, this time fueled by the benefits provided by crypto.

If they don’t, others will — and the U.S. may not be able to catch up.

The Crypto Securities Market is Waiting to be Unlocked. But First We Need Workable Rules. was originally published in The Coinbase Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.