Coinbase’s Institutional Clients Are Unfazed by the SEC’s Lawsuit
Asset managers that do business with the digital currency exchange were expecting a crypto crackdown.
The Securities and Exchange Commission’s lawsuit this week against Coinbase Global — which claimed it was operating as an unregistered broker-dealer — was another negative blow to a cryptocurrency industry still recovering from events last year.
In 2022, Terraform Labs and its stablecoin collapsed; Three Arrows Capital and other crypto companies filed for bankruptcy; and criminal and civil charges were filed against Sam Bankman-Fried, the founder and former CEO of FTX Group, for running a massive yearslong fraud.
The general sentiment toward crypto has worsened and the SEC’s lawsuit against Coinbase — which came a day after it sued Binance and its founder — aren’t helping, crypto asset management firms admit.
“What is the bull case for $COIN now?” short seller Jim Chanos tweeted about Coinbase on Tuesday after the SEC’s complaint was filed.
But at least two of the large crypto asset management firms that are clients of Coinbase Institutional (which offers them custody, prime brokerage, and other services) are unbothered by the recent lawsuit.
In fact, the SEC’s complaint could prove to be a crypto epoch that leads to a welcomed new era for the young asset class.
No asset manager wants one of their service providers to be the subject of SEC litigation, but the lawsuit against Coinbase was expected, said Jeffrey Park, head of alpha strategies and a portfolio manager at Bitwise Asset Management, a client of Coinbase but not Binance. (Coinbase received a notice from the SEC in March that said the regulator planned to bring an enforcement action against the company.)
“While this is a disconcerting time for the industry, the end result is very clear in that it’s great for the crypto community at large if we have more regulatory clarity,” Park said. “I think it’s probably helpful that the market now has this out in the open. The reality is Coinbase has been preparing, both privately and publicly for a long time, to vigorously fight most of these [allegations] in court and they’re well-equipped to contest the lawsuit.”
Baring other developments in the case, it’s business as usual between Coinbase and Bitwise, Park said.
Mark Yusko, founder, CEO, CIO of Morgan Creek Capital Management and the managing partner of Morgan Creek Digital, said his firm is a Coinbase client and that the SEC’s lawsuit hasn’t caused it to reconsider the relationship.
Morgan Creek is not a client of Binance, which is facing more worrisome charges, Yusko said. The SEC has made more calamitous allegations against Binance and intends to freeze Binance’s U.S. assets, arguing that $2.2 billion in client assets are “significantly at risk.” If similar claims were made against Coinbase “that would probably change our perspective,” Yusko said.
Morgan Creek is paying close attention to the outcome of the Coinbase lawsuit and would react as necessary to any developments, but Yusko says the exchange’s “processes and procedures are very sound.”
Yusko believes the SEC’s lawsuits are a growing pain for the industry and will ultimately help encourage more institutions to invest in crypto.
During and after the downfall of FTX, “nobody wanted to talk to us,” said Yusko, who previously was the CIO of the UNC Management Company, the endowment office for the University of North Carolina. Now “people are saying, ‘Huh, now we know where the regulatory agency stands, that provides more clarity, that provides some guardrails,” Yusko said.
Gary Clarke, chief investment officer at crypto asset manager Old Street Digital, described the recent regulatory actions as a ”clearing out phase” for ”bad actors and second-rate actors.” Said Clarke, “We need proper regulations and clarity. If that has to come from the SEC then fine by me, I’m not hiding anything.”
Some have more bluntly argued the crypto world should embrace an SEC crackdown. However, Clarke wishes there was a legislative process that established laws with the technology in mind and eliminated any ambiguity about what is allowed. “I have great sympathy for Armstrong and Coinbase because I think they are trying to do the right thing but don’t know exactly how,” Clarke said.
Park is also team Coinbase.
“I think as an industry we are rooting for regulatory clarity and we genuinely don’t believe there is a better player equipped, both financially and with the right human capital, to lay its argument forward and lead that path than Coinbase,” Park said. “This is, I think, a culmination of a lot of stress points that have resulted in something that otherwise the industry is cheering for.”