Coinbase’s Chief Legal Officer Shades SEC, Deaton Responds

Grewal faults the SEC’s claim that most crypto assets are securities.

Coinbase’s chief legal officer Paul Grewal in a tweet today, threw a subliminal jab at the US Securities and Exchange Commission, poking holes at the claim that most crypto assets are securities.

The attorney made his point by citing the Howey test, which is fundamental to US securities law. In this case, W.J. Howey Co. offered an investment contract for oranges, but it did not make oranges investment contracts or securities, according to Grewal.

“An investment contract for oranges does not make an orange an investment contract,” Grewal tweeted.

An investment contract for oranges does not make an orange an investment contract.

— paulgrewal.eth (@iampaulgrewal) January 17, 2023

Deaton And The XRP Community Respond 

Unsurprisingly, Grewal’s comments have elicited a response from fellow attorney John Deaton and the broader XRP community.

It bears mentioning that Deaton, in a petition for a writ of mandamus against the SEC in January 2021 and an amicus brief on behalf of Naomi Brockwell in support of LBRY against the SEC, had made the same arguments. In response to Grewal today, Deaton pointed out that when the SEC, in its complaint against Ripple, had alleged that XRP (the equivalent of the oranges in the Howey case) is a security, he had urged Coinbase to band together with Ripple to fight the charges. Instead, it delisted XRP.

While Deaton concedes that his suggested approach would have been unconventional, he points out that the SEC claim implicitly tagged oranges as securities. According to the attorney, this is why thousands of XRP holders joined in his motion. It is worth noting that the attorney represents thousands of XRP holders as a friend of the court in the SEC case against Ripple.

When the @SECGov sued @Ripple and literally alleged that XRP was an investment contract (the functional equivalent of saying oranges ? are), I argued @coinbase should not only not delist XRP but file a motion to intervene or alternatively ask to be amicus. 1/2 https://t.co/iVLclGPlud

— John E Deaton (@JohnEDeaton1) January 18, 2023

Meanwhile, the broader XRP community is again calling on Coinbase to re-list the token in response to Grewal’s latest comments.

Then you should Relist #xrp to put your statement to the real test https://t.co/QxzNsAlDae

— TheFutureisHere (@SpaceDoggosNFT) January 18, 2023

Coinbase, in November, became a friend of the court in the Ripple case, supporting Ripple’s fair notice defense and faulting the SEC for not providing clear rules for the crypto markets. However, as highlighted by attorney Jeremy Hogan, it failed to include its extensive analysis from 2018, which concluded XRP was not a security. As often cited by Deaton, the crypto exchange met with the SEC in 2019 after this analysis to get approval to list XRP. Notably, the SEC approved.

The SEC’s Crypto Enforcement Strategy

Grewal’s comments come as the SEC has launched legal action against fellow US crypto exchange Gemini for the unregistered offer and sale of securities through its “Earn” program. Notably, the SEC had prevented Coinbase from offering a similar product despite knowing about Gemini’s Earn program for over a year and Coinbase’s broker-dealer license. 

As recently reported, former SEC enforcement chief Lisa Braganca has said that the SEC’s actions have left her puzzled.

Recall that last year, in a case against a former Coinbase product manager accused of insider trading, the SEC had fingered 9 cryptocurrencies listed on the exchange as securities. Notably, Coinbase vehemently refuted these claims asserting that no asset listed on its exchange was a security. In addition, it petitioned the SEC to create clear rules for the crypto market.

However, SEC chair Gary Gensler has continued to assert that new rules are not needed for the emerging market as he believes that the rules in traditional financial markets apply. Instead, Gensler has claimed that most cryptocurrencies, except Bitcoin, are securities. Consequently, Gensler has often called on industry participants to “come in and register” with the SEC.

Notably, FOX Business’s Charles Gasparino has speculated that a loss for Ripple in the case against the SEC could be the proverbial feather that breaks the camel’s back and forces other cryptocurrencies to register.

Meanwhile, despite Gensler’s calls for registration, the crypto industry has often complained of the SEC’s lack of responsiveness to inquiries.