Coinbase’s Policy Chief Shirzad is in a dispute with SEC’s Enforcement Director Grewal.

This morning, lawyers and journalists gathered in a conference room overlooking the streets of Manhattan to preview what could be a major legal battle in the world of cryptocurrency. The U.S. Securities and Exchange Commission (SEC) versus Coinbase was the topic of discussion, and it was clear that the legal showdown to come could be anything but polite and vague.

The discussion, sponsored by Rutgers School of Law and the law firm Lowenstein Sandler, went beyond legal formalities to delve into matters of principle and theory, including the question of whether cryptocurrency should be allowed to exist in the United States at all.

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Ultimately, the conversation highlighted the broader challenge of communication between the crypto industry and regulators, as the two sides often seem to be talking past each other.

The law is the law

On one side of the debate was SEC Director of Enforcement Gurbir S. Grewal, who discussed the SEC’s enforcement suit against Coinbase with Rutgers law professor Yuliya Guseva. Grewal explained that the suit was the result of a series of signals sent over the past five years or more, with the SEC taking action because Coinbase did not respond to earlier warnings.

Grewal also discussed the decision to focus on exchanges like Coinbase and Binance instead of individual token issuers, citing limited resources and the need to make judgment calls. Additionally, he addressed the challenge of regulating decentralized exchanges (DEXs), noting that entrepreneurs are often at the center of these projects and that simply claiming to be decentralized is not a defense.

In a notable comment, Grewal warned crypto influencers, particularly YouTubers, against exploiting minority groups with promises of financial inclusion, calling such conduct “egregious.”

The loyal opposition

Following Grewal was Coinbase Chief Policy Officer Faryar Shirzad, who previously worked in government affairs for Goldman Sachs and the George W. Bush White House. Shirzad suggested that the SEC may be interfering in an ongoing legislative process and made the same argument in legal filings under the Administrative Procedures Act.

“The normal dynamic in Washington [D.C.] is that when the constitutional branches of government are [acting], typically regulators will step back and let the political branches figure it out,” said Shirzad. “It’s not typical that you’ll see congressional action moving in earnest, and not just a government department, but a regulatory agency, rush in to redefine facts on the ground to get ahead of that. I don’t know if that’s happening here … but if that were happening, it would be unusual.”

Shirzad is suggesting that it is unusual for a regulatory agency, rather than Congress or another government department, to redefine facts on the ground to get ahead of the political branches. He is unsure if this is happening in this case, but if it was, it would be unusual.

“I don’t know whether there’s a dimension of legislative strategy to this,” Shirzad mused. “And there’s the chairman saying we don’t need more digital innovation, so there may be some of that.”

Shirzad is wondering if there is a legislative strategy behind this situation. He also notes that the chairman has said that they do not need more digital innovation, so this may be a factor.

While the SEC claims it is enforcing the law, the industry is struggling to argue that existing law doesn’t work for many blockchain-based digital assets.

Shirzad argues that relying solely on existing law to regulate cryptocurrency will harm U.S. competitiveness and innovation.

“This is not just a convenience issue over whether one industry can operate in the United States. We’re at a critical juncture … blockchain is the value layer of the internet. That has significant implications,” Shirzad said, citing several ongoing blockchain pilot projects by the likes of JPMorgan as evidence.

Shirzad also highlights that the SEC’s approach may go against the agency’s goal of protecting investors.

“To the extent it becomes part of public policy to push exchanges offshore, you’re pushing that nexus between policy and U.S. law out of the perimeter of U.S. law. That’s a big deal. This has to be a matter of national strategy,” he said.

The SEC believes that enforcing the law, as it is written and strictly interpreted, is the most important factor in this situation. However, Coinbase believes that the future is at stake and it has not yet been written.

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