If you go by a handful of headlines and chatter on Crypto Twitter, you might think that the largest publicly-traded crypto exchange Coinbase now thinks bitcoin is about as valuable as a Beanie Baby. And forsooth, good man, woman or human! It is a comparison the exchange drew, in a formal legal document no less. In a motion to dismiss the lawsuit brought by the U.S. Securities and Exchange Commission (SEC), Coinbase apparently “backpedaled” on a lifetime of saying crypto is the future of finance. The document was submitted on Aug. 4, 2023 but seemingly only recently has caught attention. To wit: “On Coinbase’s secondary-market exchange and through Prime, there is no investment of money coupled with a promise of future delivery of anything. There is an asset sale. That’s it. It is akin to the sale of a parcel of land, the value of which may fluctuate after the sale. Or a condo in a new development. Or an American Girl Doll, or a Beanie Baby, or a baseball card.” American Girl Doll? No doubt Coinbase missed the moment to capitalize on the Barbie buzz. But, no, the exchange has not given up on crypto afterall. Instead the exchange was fleshing out the argument that the nation’s top securities regulator — the SEC, chaired by Gary Gensler — lacks jurisdiction to sue the California-based company because the assets Coinbase deals in are not securities. In particular, in this case, the exchange is arguing about the legality of its secondary trading service called Prime. I’m not going to go through the history of securities law or how it should be applied to cryptocurrencies: I’m not a lawyer, and there’s plenty of more informed content to read on the matter, given that securities law is seemingly about the only thing discussed in crypto anymore. But I will say Coinbase’s argument here, specifically about “transactions on Coinbase and through Prime,” generally falls in line with a recent court decision in the SEC’s case against Ripple Labs, which found that most secondary market sales do not represent “investment contacts” or a securities offering. When you buy crypto from Coinbase, you are just buying crypto — not a stake in the company’s equity or a claim on its future earnings (one of the prongs of the preeminent Howey Test to determine such things). As is the case for Barbie dolls, Beanie Babies or even fine art, buyers may be hoping the asset appreciates in value, maybe especially from the later efforts or labor of Mattel or a Picasso to improve their reputation. Reasonable people can and have disagreed. Conceptual artist turned law professor Brian Frye, for instance, argues that basically any material good could be considered a security if the SEC wanted to. He’s goaded the SEC to sue him by creating legal documents/art and selling them as NFTs that more or less promise buyers future profit. And, in many cases, it absolutely makes sense to treat cryptocurrencies as securities. Especially when cryptocurrency issuers are doing as much, like when a startup looking for working capital sells tokens to hedge funds or other “qualified investors” (cough, cough Ripple Labs). By and large, that isn’t what Coinbase is doing. It’s merely creating opportunities for interested buyers to acquire crypto. The realities and distinctions of assets like bitcoin and XRP matter when compared to traditional securities like stocks or bonds. The price of these assets often benefits from being listed on an exchange, but open and permissionless networks do not require them for these assets to proliferate. Likewise, Coinbase doesn’t really need me to come swinging for its defense. But for crypto’s skeptics that supposedly value transparency and truth telling more than anyone else, the claim that Coinbase is rolling over at the sight of the SEC is just plain materially wrong. (Finally! An answer to the age-old question of who’s watching the watchers?) This isn’t to say Coinbase is faultless. Just weeks ago the exchange’s PR unit had to correct the record after CEO Brian Armstrog suggested the SEC asked it to delist all cryptocurrencies but bitcoin, a widespread story that resulted either due to a media error or a misguided attempt astroturfing a “narrative” that became too real too fast and would likely have soured the court’s opinion in its ongoing legal battle. It’s a company I’ve criticized in the past and will likely continue to, in part because like all crypto exchanges it facilitates some of the worst behavior in crypto where traders essentially play-zero sum games in a quest for riches. I wouldn’t call Coinbase a bucket shop, but considering the trouble it’s had diversifying its income away from trading fees it is inextricably tied to “the degens” — no matter how much Coinbase wants to talk about crypto’s transformational potential. Almost every time someone profits from selling a crypto, it’s at the expense of someone else who bought into the system. This is precisely because these immaterial assets rarely have a connection to the real world and often generate little societal value. Many cryptos are created with a purpose, but go unused and so don’t contribute to actually making the world better. (There are the edge cases where dissidents and others in need benefit from the existence of a payments system that asks no questions of them, which, in my opinion, is enough reason for them to be. Plus, I’m not vain enough to think all of crypto is terminal or that organic use won’t come about.) In a sense, this capital accumulation for the sake of capital accumulation is precisely why cryptocurrencies are not securities. It’s a raw representation of the value that people see in the network, not in the Coinbase’s or Binance’s where they’re purchased. The same is true of Beanie Babies, otherwise wouldn’t Toys R Us still be around? For what it's worth, a few years ago I actually spoke with a trader who called the top of the Beanie Baby bubble, appropriately named the "Beanie Meanie," who said crypto's lack of adoption isn't all that surprising given in his estimation it "takes 30 years to create a viable secondary market" in novelties. Does that timeframe speed up if crypto is more useful than a doll? Or mean that mean even [rhymes with bitcoins] like “pepeyieldunibotsatoshidoge” will one day find a nostalgic or marginal buyer? Will former Supreme Court Justice William John Howey, rolling in his grave, reemerge to become crypto's ultimate "Blockchainer Complainer?" (I know it needs a little work to top "Beanie Meanie.") In the end, you can hate crypto or hate Coinbase but you can’t can’t honestly say Coinbase doesn’t believe in crypto. It’d be pure insanity to go through the technical and legal issues of launching a layer 2, if you just thought crypto was a toy going to sit and go dusty on the shelf. – D.K. @danielgkuhn [email protected] | 