Coinbase's novel legal strategy vs. the SEC

Coinbase is road-testing a new line as it ramps up its legal fight against the Securities and Exchange Commission. It goes something like this: If you think our business is illegal, you could have said so earlier. Instead, you gave us the go-ahead to be a public company just two years ago. What’s up with that?

The argument is appealing and easy to understand and is getting some traction in the media. The Wall Street Journal devoted a whole story on Friday to Coinbase’s “novel defense,” providing the company an opportunity to amplify its point that the SEC’s recent crusade is unfair.

Unfortunately for Coinbase, if you’re putting forth a “novel” argument in response to a potential lawsuit, that’s not a position you want to be in. Novel arguments are great when it comes to law journal articles or as part of an activist group’s long-term legal strategy. But you don’t want to be relying on them in a court of law—it typically means you have a weak hand.

As compelling as Coinbase’s argument might be as a matter of fairness, it may not hold up in court. As several lawyers told the Journal, the SEC’s IPO vetting process is focused on how well the company has disclosed the risks of its business model to investors—not the legality of the business itself. Bloomberg’s Matt Levine, a former securities lawyer himself, is sympathetic to Coinbase but makes the same point.

“Technically the SEC never gave any official approval of Coinbase’s business model, and technically ‘you let us get away with doing illegal stuff for a few years so you can’t stop us now’ is not a good legal argument. But I see why they’re annoyed,” Levine writes.

Coinbase’s lawyer, Paul Grewal, knows this too, of course. A whip-smart (and well-compensated) guy, Grewal is a former federal judge. What he’s doing appears to be part of the company’s broader strategy of scoring points in the political arena, and hoping to stoke a backlash against the SEC’s crackdown on crypto. Indeed, Coinbase put forth its novel argument not in a court filing but as a response to the SEC’s recent Wells Notice warning that the agency plans to undertake enforcement action. In the ordinary course of things, companies shut up when they get a Wells Notice—they don’t share their response with the public while trotting out new legal theories.

This doesn’t mean Coinbase’s strategy is a bad one. The more press it can get to highlight the SEC’s inconsistent and arbitrary behavior, the better chance it has to pick up allies in Washington, D.C., who are willing to put pressure on the agency to pull back from its recent kill-all-the-crypto approach.

Jeff John Roberts
jeff.roberts@fortune.com
@jeffjohnroberts

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