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Crypto regulation: ‘I think we’ll see significant action towards legislation this year,’ Coinbase exec says

Coinbase Head of Public Policy Faryar Shirzad joins Yahoo Finance Live to discuss Coinbase’s battle with the SEC amid crypto regulations, not meeting the SEC’s guidelines for the Howey Test, and the outlook for Coinbase.

Video Transcript

RACHELLE AKUFFO: Cryptocurrencies resumed their rally on Friday, climbing above 26,000 for the second time this week for Bitcoin. Now, for more cryptocurrency and the path to regulations in the United States, we welcome Yahoo Finance's Jennifer Schonberger. Hey, Jennifer.

JENNIFER SCHONBERGER: Thanks, Rachelle. SEC Chair Gary Gensler has repeatedly called on crypto firms to come in and register with the Commission and come into compliance with securities laws. Back in December, I asked Chair Gensler why it's been taking so long for crypto firms to get registered. Here's what he had to say.

GARY GENSLER: It really is on these entrepreneurs and business leaders in the crypto space. And it's an area that has grown up worldwide with a lot of intermingling of customer funds on their platforms, providing interest returns to their customers, and then trading against their customers and the like.

JENNIFER SCHONBERGER: I put this to Coinbase's chief policy officer Faryar Shirzad and asked whether Coinbase has attempted to register with the SEC and what their experience has been. We also talked about coming into compliance and forthcoming crypto legislation. Here's what he had to say.

FARYAR SHIRZAD: There's no path to registering. We've tried, and there's just no way to do it. And in fact, we've submitted a petition with the SEC back in June where we enumerated the specific issues that the agency would have to resolve for crypto platforms to be able to come in and register. We think the opportunity to build a crypto securities market in the United States is enormously exciting, but we've stayed away from it because there's no path to registration and there's just no way to do it.

JENNIFER SCHONBERGER: When you say there's no path to registration and you've submitted a petition, has the SEC responded to you?

FARYAR SHIRZAD: No, unfortunately, they haven't. And, you know, I know you've had the chair on. You've had other SEC officials on. I'd encourage you to ask them. When they say come in and register, when they say download the document from the website, ask them, register as what? In what capacity? How is it that under current rules, you can't trade tokenized instruments under a national stock exchange or an ATS?

Will the SEC address that in some fashion? There's a huge opportunity for the agency to engage in a public notice and comment process where everybody, the agency, stakeholders, industry, can all come in and share views and how we get to a path to creating a crypto securities market in the United States. But until that happens, there's just no way to get there.

JENNIFER SCHONBERGER: And you've tried to follow up. In other words, SEC Chair Gensler said it's on the exchanges. He says he wants to get crypto firms to come into compliance this year. But when you've tried to follow up, you haven't heard anything back. Is that correct?

FARYAR SHIRZAD: Well, we talked to all the regulators. So we talked to the CFTC, the state regulators, the Treasury, the CFTC. You name it-- we talked to all of them, including the SEC. But when we asked specific questions, how do we get to a path to registration, there's never an answer.

JENNIFER SCHONBERGER: Faryar, in an amicus brief that Coinbase filed on Monday, Coinbase says that the digital assets that currently trade on your exchange are not securities you would like to talk to the SEC, obviously, so that you can begin trading securities. My question is, why is it that the assets that currently trade on your exchange are not securities? Why do they not meet that so-called Howey test that the SEC uses?

FARYAR SHIRZAD: Well, there's a four-part test known as the Howey test, which is the best guidance that we have. So it's about a 70-year-old Supreme Court decision that enumerated four factors that you essentially would apply to determine whether a particular contract is an investment contract and therefore treated under the 1933 and 1934 acts as a security and therefore requiring SEC registration. So it's quite complicated. But we review the four factors of the Howey test, apply them towards each token. And if we feel like it's too close to the line, then we just don't list it.

JENNIFER SCHONBERGER: I want to ask you about the custody rule that the SEC has put forth in terms of extending that to apply to crypto. You put out a statement stating that Coinbase is a qualified custodian. Has the SEC put its stamp of approval on that?

FARYAR SHIRZAD: Well, the SEC put out a-- to its credit, actually-- we've been asking for rulemaking in all sorts of aspects of crypto markets. This is an area that impacts us that where there was actually a rulemaking. And so the agency put out a proposed rule. And under the terms of the proposal that the agency put out, it's clear that our custody entity, CTCT, is a qualified custodian. And we're confident that as the rule gets finalized, it will remain a qualified custodian. So we feel quite good about that.

JENNIFER SCHONBERGER: Mm-hmm. And I want to ask you also, Coinbase CEO Brian Armstrong tweeted recently, he was hearing rumors that the SEC would like to get rid of crypto staking. I put that question to the SEC. The SEC says that they regulate conduct, not industries. Of course, we saw what happened with Kraken. Are you hearing anything new from the SEC on the staking front?

FARYAR SHIRZAD: No. I mean, like with everything that comes out of the SEC, we have to parse through the information that's available to try to connect the dots to see whether there's an element of what they've said that applies to us. We've looked at the Kraken settlement quite closely, compared it to our own staking offering, and it's very different.

Our staking offering is not a security. We essentially provide a passthrough service to anybody who can do staking on their own, should they choose to, but instead ask us to do it for them. So we do the staking. The protocol decides what the returns are and the terms under which the staking event takes place. We charge a fee, a transparent fee that's known ahead of time, on top of that. So we're providing a service, a fee for our service. And it's far from it being a security. And the-- we're very confident that if necessary, we'd be able to defend it quite effectively.

JENNIFER SCHONBERGER: Of course, I know that you, along with the rest of the crypto industry, would really like a new tailored set of rules from the Securities Exchange Commission for crypto. But the flip side of that would be legislation from Congress. Are you hearing, are you talking with lawmakers on Capitol Hill right now about what we could see on the legislative front this year? Could we expect some sort of new regulatory framework for crypto this year?

FARYAR SHIRZAD: I think we'll see significant action towards legislation this year. There about by the end of the last Congress, which ended last December, there were probably seven big important bills with bipartisan support in the House. The Senate, Democrats, Republicans, the Banking Committee, the Agriculture Committees, the House Financial Services Committees, all the relevant bodies, both sides of the aisle, both sides of the Capitol, are very much of a view that we need regulation around crypto for crypto commodities to create a spot market authority at the federal level for crypto securities to essentially encourage the SEC to provide the clarity that it hasn't itself provided.

And then for stablecoins, that we expect from our conversations with policymakers that you'll see significant action towards legislation, starting almost immediately. Now, legislation is a hard thing to get done. But there's a lot of interest and motivation to get going on the process. And we think that's quite exciting.

JENNIFER SCHONBERGER: And my thanks to Coinbase's chief policy officer Faryar Shirzad for that interview. Now, separately, given all of the fallout that we're seeing from the bank failures and questions around executive compensation and bonuses, Rachelle, I'm just getting some breaking news in right now that the Biden administration is about to announce that they need Congress to draft legislation to strengthen their authorities on clawbacks and penalties for that. House Financial Services Committee ranking member Maxine Waters is drafting a letter in response that she's about to come out shortly with that, that she is working on legislation to give the administration those powers. Back to you.

RACHELLE AKUFFO: Appreciate that breaking news there. Jennifer Schonberger there for us.