Celsius creditors approve restructuring, but SEC balks at Coinbase’s role

Celsius Network creditors are on board with the bankrupt digital asset lender’s restructuring plan, but America’s securities regulator isn’t sure the Coinbase (NASDAQ: COIN) exchange should play a role.

On September 25, the U.S. Bankruptcy Court for the Southern District of New York was informed that Celsius’s rank-and-file creditors had voted in favor of a plan that will see them reunited with some of the assets that survived Celsius’s implosion in July 2022. The vote still requires the approval of the Court, which will convene a hearing on the matter on October 2.

Over 98% of creditor groups voted for the plan that envisions Celsius returning between 67-85% of the assets customers had entrusted to the lender before it was exposed as a massive Ponzi scheme. There are around $2 billion worth of various assets (primarily BTC and ETH) to be distributed.

While Celsius creditors may be on board, the restructuring plan received pushback from the U.S. Trustee—a division of the Department of Justice (DoJ)—and the Securities and Exchange Commission (SEC). The Trustee’s objections are not new, taking issue with the plan continuing to include “release and exculpation provisions that are over broad and contain prospective parties and activities.”

The SEC’s objections were more focused, saying aspects of the restructuring “raise concerns under the federal securities laws.” Specifically, the SEC claims that the agreements under which Celsius proposes to use Coinbase to return assets to Celsius’s international customers “go far beyond the services of a distribution agent, contemplating brokerage services and master trading services that implicate many of the concerns raised in the SEC’s District Court action against Coinbase.”

The SEC has accused Coinbase of operating as an unregistered national securities exchange, broker, and clearing agency while also failing to register its digital asset staking-as-a-service program. Similar actions were filed by ten state securities regulators who also took exception to Coinbase’s staking program.

The SEC’s objection to Coinbase participating in the Celsius distribution notes that the Celsius Debtors “confirmed that they do not intend for Coinbase to provide brokerage services to the Debtors, despite the language in the Coinbase Agreements to the contrary.” Given the “missing or inconsistent” terms of this language, the SEC says the Court shouldn’t approve any agreement without clarifying Coinbase’s role.

Coinbase is proud to engage with Celsius to distribute crypto back to its customers. I wonder, why would the SEC object to a trusted US public company taking on this role?  We look forward to addressing this with the bankruptcy court and undertaking our important role to make… https://t.co/5i1aJDiPXp

— paulgrewal.eth (@iampaulgrewal) September 25, 2023

Reaction from the Coinbase camp was swift, with chief legal officer Paul Grewal tweeting his bewilderment at why the SEC would “object to a trusted U.S. public company taking on this role?” But Grewal, who has been among the more vocal Coinbase executives pushing back against what they perceive as the SEC’s regulatory overreach, couldn’t leave it there, adding that Coinbase was looking forward to “undertaking our important role to make Celsius customers whole.”

This brought a swift retort from venture capitalist Chris Dixon, who reminded Grewal that Coinbase “won’t be making Celsius creditors whole. You’ll be distributing the approximate 30% of liquid crypto if approved.” Grewal was forced to walk back his triumphalism, acknowledging that Coinbase’s involvement in this process was limited and that nobody was being made whole.

Honestly, under Grewal’s logic, it’s your mailman who issues your income tax refund (so you better tip him well this Christmas). But we guess when you’ve been on the kind of prolonged losing streak that Coinbase has endured over these past couple of years, you’re positively gagging for any sort of win.

You have our interest

More impartial observers of Grewal’s tweets would claim he was taking liberties with the word ‘trusted.’ Consider Coinbase’s history of run-ins with regulatory bodies, including the $100 million penalty the exchange paid in January to atone for its shoddy approach to anti-money laundering/know-your-customer compliance in New York State.

cc @brian_armstrong @coinbase Your app recently changed so that when you click "Sell" on USDC, it defaults to selling for…Bitcoin.

There's no reason this should be the default thing that happens when you click "Sell USD Coin." pic.twitter.com/otFWFAu52o

— John Palmer💡 (@john_c_palmer) September 22, 2023

More recently, Coinbase was called out for appearing to deceive its customers into exchanging USDC—the closest thing to an in-house stablecoin at Coinbase—for BTC rather than cash when they click the ‘Sell USD Coin’ button. While this may be a mere bug, frustrated customers who found themselves holding BTC rather than the fiat cash they expected would need to re-sell their BTC, incurring additional transaction fees in the process.

Ensuring that USDC isn’t converted to cash also serves Coinbase’s bottom line due to its increasing reliance on revenue from holding its customers’ USDC (and sharing the interest on the fiat reserves backing USDC with its issuer Circle). So, every USDC token not relegated to the ‘burn’ bin is less revenue Coinbase has to find somewhere else before its next quarterly report.

Exchanges that pay ‘rewards’ for parking certain assets appear to be flying in the face of U.S. banking laws, which restrict the types of financial institutions allowed to offer interest-paying dollar accounts to retail customers. John Paul Koning recently posted a blog on Coinbase’s typically inventive interpretation of these rules.

Koning notes that Coinbase’s most recent analyst call featured CFO Alesia Haas declaring that the company had only just decided “what the right accounting treatment” would be regarding the “material rewards” it was paying its USDC customers.

Despite the costs associated with these payouts being in the tens of millions of dollars, Haas said Coinbase decided it was “a sales and marketing expense, because it’s really more like a loyalty reward program that we’re running on USDC.” Koning notes that this decision was made despite Coinbase’s marketing using terms such as ‘APY’ and ‘rate increase,’ which are far more typical of interest-generating products than loyalty points.

The SEC’s recent civil suit against the Binance exchange targeted its ‘BUSD Rewards’ program for the BUSD stablecoin as an unregistered securities offering. Coinbase appeared to try to strangle this potential crisis in the cradle back in 2021 by informing the SEC why it believed the USDC Rewards program wasn’t a security.

Then again, Coinbase doesn’t believe any product it offers is a security. Regardless of the scenario, Coinbase’s C-suite continues to bet they’re smarter than the average financial regulator, even when they’re not. Their long-term plan appears to be keeping the bluff going until Donald Trump is re-elected and Don Jr. is appointed the new SEC chairman.

One token over the line

But the clear frontrunner for the product that will trip up Coinbase is Base, its recently launched Ethereum ‘layer 2′ solution (on which USDC was officially launched earlier this month). When it first introduced Base in February, Coinbase used bold type to make sure its customers understood: “We have no plans to issue a new network token.”

No plans? Perhaps. No ambitions? That’s another story. Last week, Grewal told Decrypt’s Andre Beganski that while “the tokenization of the protocol is frankly something that we are less focused on at present [emphasis added],” launching a bespoke Base token is “not something we’ve ruled out entirely.” So basically, it’s going to happen. They just need to build up a critical mass of Base users before unveiling ‘Coinbase Direct Listing 2.0.’

Coinbase is behind the curve on this front, as other exchanges like Binance have given themselves huge advantages by issuing backed-by-nothing tokens such as BNB. Consider how Sam Bankman-Fried’s FTX was able to keep its financial fraud afloat for so long, largely by minting scads of its own Chuck E. Cheese token FTT.

But a bespoke Base token could be the final straw that pushes U.S. authorities from civil to criminal investigations. Particularly since nobody is buying Coinbase’s insistence that—while it currently serves as Base’s lone transaction validator—it remains “deeply committed to progressing towards full decentralization over the years ahead.” [Emphasis added.]

Does anyone else want to wager that a Base token arrives long before Base is fully decentralized?

Bro down! 

We’ll close by circling back to Celsius and the new group oh-so-cleverly dubbed Fahrenheit that’s assuming operational control of what remains of Celsius’s various units. It was recently revealed that Arrington Capital founder Michael Arrington—who was nominated to hold one of the nine seats on Fahrenheit’s board of directors—won’t be joining the board as planned.

Arrington tweeted that while he “still fully support[s] the deal” and Arrington Capital’s “investment and advisory role via Fahrenheit will go on as planned,” his board seat will be taken by Ravi Kaza, an Arrington Capital investor and advisor.

Arrington’s self-admitted “heavily edited by attorneys,” tweet said he “disagree[d] with some of the decisions made around board constitution and, in particular, the board observers.” This is thought to be a reference to investor/observer Simon Dixon, who tweeted a response saying he wished Arrington “the best” and there was “no offence taken.”

With any luck, this budding ‘crypto’ feud won’t end up with one of the above individuals going full Bitboy and being arrested with a handgun outside his rival’s house while livestreaming a rapid-fire-not-at-all-chemically-induced monologue about how bitch better have my money.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of group—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.