Coinbase (COIN), a crypto exchange, said that the U.S. Securities and Exchange Commission makes decisions “on-the-fly” about alleged legal infractions.

The San Francisco-headquartered platform pushed back against the SEC in a document this month, made public for the first time on Thursday, in responding to a Wells Notice – a formal warning from the SEC that the Enforcement Division found sufficient proof of lawbreaking that it may recommend a lawsuit against the exchange.

Coinbase’s argumentation is based on the notion that the cryptocurrencies listed at the exchange aren’t securities. This stands in stark contrast to the claims of SEC chair Gary Gensler who has stated repeatedly that, according to him, the majority digital assets meet federal law standards for securities. The document also argues that, even if some digital assets listed by the exchange are securities under federal law, Coinbase products do not meet those standards.

When it filed its notice, the SEC warned Coinbase that it could sue. The SEC says that Coinbase’s staking services, Prime and Wallet, as well as its general listing procedure, could all be in violation of federal securities laws.

Gensler, in a shared earlier Thursday, reiterated his belief that crypto intermediaries should register as regulated U.S. entities. “Crypto Markets suffer from a lacking of regulatory compliance.” He said that the problem is not lack of clarity in regulations.

Investment contracts exist when money is invested in a joint enterprise, with the expectation that profits will be generated by others. He said that intermediaries for investment contracts – whether they are exchanges, brokers or dealers – must comply with securities laws and be registered with the Securities and Exchange Commission. “Many crypto platforms pretend that the investment contracts they offer are like goldfish,” he said, using an example of pets.

Coinbase, in its April 19 response to the regulator, said that it had “repeatedly answered” SEC staff’s questions regarding how it determines whether listed assets are securities or not. The exchange also pushed against SEC accusations that it operated simultaneously a national securities market, brokerage, and clearinghouse.

The exchange claimed that “the threat of imminent litigation” was intended to force Coinbase into accepting demands that it did not have authority to make. Specifically, the exchange demanded that Coinbase: (i) accept that virtually all digital asset listed on Coinbase’s platform are securities, and (ii), overhaul its business model in order to register as a NSE (national securities exchange) and clearing agency. This could require Coinbase jettisoning its entire customer facing business and overhauling its public company governance to conform to limitations on “Neither of these objectives are supported by law, or within the Commission’s jurisdiction.”

Coinbase, as part of its response to the incident, created a video in which CEO Brian Armstrong and general counsel Paul Grewal discuss the history of the exchange.

Grewal informed CoinDesk, that after the SEC received the response, representatives of the exchange met with SEC officials. A majority of five SEC commissioners must vote in favor of any SEC enforcement action. Wells’ response will allow the commissioners to consider both the Enforcement Division argument and the company response before they vote.

He said, “Our impression is that they are still unpersuaded on the staff level.” We’ve been preparing for lawsuits for some time, to be clear. I am always optimistic that cooler heads prevail, but do not think that we have any hope of the SEC changing its mind.

Operating licenses

The company stated that Coinbase has both a broker dealer and an alternative trading system, but it needs approval from the SEC and Financial Industry Regulatory Authority to operate these systems. The company also claimed to have 45 money transmitter licences, as well as a New York BitLicense.

The exchange also sent a series of questions to the SEC about the asset listing process, Wallet and the staking service. The exchange has said that the SEC now alleges that all three types of products could be in violation with securities laws.

The Appendix A includes a chronology of Coinbase’s engagement with the Commission during a four-year period. It spans eight pages. This list includes dozens instances where Coinbase asked the Commission for clarity on when digital asset companies might need to register and how to do so. It also included its dormant ATS and broker-dealer.

Coinbase responded to SEC staff inquiries about these products by providing information, but the staff did not raise any concerns at the meetings.

The exchange also claimed it had not received “fair notice” about the enforcement action from the regulator, and argued repeatedly in the document “one media comment by a Commission member is not policy advice.”

We’ve seen SEC change its position about what assets qualify to be securities. The chair has made statements dating back to when he was at MIT, where he stated that 75% assets were not securities. Even after he was appointed chair, he still believed that there was no registration system in place and was ready to work with Congress,” Grewal stated.

Coinbase’s filing suggested that the SEC should clarify its view of digital assets as securities.

The filing stated that “Coinbase is always available and eager to talk about these issues, if the Commission wishes to examine how issues such as issuer disclosure and brokerage, custody and clearing can be addressed in the digital asset security markets.” These issues do not need to be brought before a judge.

Sheldon Reback is the editor.