We Are Not Your Lawyers | Customers, Etc.
The people suing you aren't going to offer you legal advice.
Back when I led the support team at Trello, we would occasionally get emails from distressed users where another board member had deleted the cards on a shared board1. Not fun! But there also wasn’t much that the Trello support team could do. Each user had a responsibility to keep their account secure, understand that all members of a board can delete data, it’s all spelled out in the terms of service, etc. etc.
Most people, when they got beyond their original frustration, would accept their fate and be more careful about who they collaborated with in the future. There were times, however, when someone would hint they were thinking about “getting lawyers involved” and would ask us to share information about another Trello user or reveal information in their account.
No, we weren’t able to share information contained within another user’s account except, we would state, “as the result of a valid legal process”. And if we’d made it this far, we’d inevitably get a reply asking for guidance about what kind of valid legal process they should follow.
If you’re a lawyer and you read the above scenario, you know exactly where this is going. Trello can’t advise its users on what is a valid legal process because Trello is not its users’ lawyers. Users have to get their own lawyers, who can then advise on what is and what is not a valid legal process.
This is all very normal when viewed from the perspective of a lawyer, but it’s not very satisfying when viewed from the perspective of customer service. In customer service, we want to help people, and when someone asks about what steps they need to take to solve their problem—so what if they’re asking about steps to solve a legal problem—we want to help! So it’s awkward if you work in customer support to say “we can’t actually help you with this, and we can’t really explain clearly why, you may wish to talk to a lawyer.”2
Anyway, I was reminded of the above situation when reading about how Coinbase Says SEC Is Investigating Its Crypto Lending Program.
Coinbase wants to launch a lending product
There’s a whole thread from Coinbase CEO Brain Armstrong describing “sketchy behavior coming out of the SEC”:
The TL;DR is that Coinbase is launching a crypto lending product and the Securities and Exchange Commission has said, in no uncertain terms, that they intend to sue Coinbase if they proceed to launch their lending product.
What is this lending product anyway?
Before we go much further, it’s worth considering if this crypto lending product Coinbase intends to launch is actually a security, which, if it is, would mean it would be subject to regulation by the SEC. I’m not a lawyer, but Matt Levine is, and he led with this story in Money Stuff recently:
Is lending your Bitcoins a security?
Oh, sure, yes, absolutely. The rule in the U.S. is that an “investment contract,” meaning “the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” is a security, and generally can’t be sold to the public without registering it with the Securities and Exchange Commission, delivering a prospectus with audited financial statements, etc.
The whole piece is worth a read, but I appreciate this high level perspective outlining both Coinbase’s and the SEC’s position:
Look, I get it. From the perspective of Coinbase, and of its customers, and frankly of most normal people interested in crypto:
People would like to lend their Bitcoins.
It doesn’t feel like a security.
It’s kind of annoying and archaic that a 1946 Supreme Court case says that it is?
But look at it from the SEC’s perspective:
The SEC really doesn’t like crypto.
The SEC is a regulatory agency that has a general tendency to want to do more regulating.
Popular tokens like Bitcoin and Ether are not securities and so not subject to SEC regulation, which leaves the SEC feeling antsy.
But crypto lending programs are pretty clearly securities subject to SEC regulation.
So for the SEC to say “crypto lending programs are securities and need to be regulated” serves the dual purposes of (1) expanding SEC jurisdiction over crypto and (2) stopping those programs.
Also it’s pretty clearly justified by a 1946 Supreme Court case.
That provides a pretty good lay of the land, but it’s not ultimately what interests me in this story.
The SEC are not Coinbase’s lawyers
I’m puzzled by the response of Coinbase’s CEO:
The SEC told us they consider Lend to involve a security, but wouldn’t say why or how they’d reached that conclusion. Rather than get discouraged, we chose to continue taking things slowly. In June, we announced our Lend program publicly and opened a waitlist but did not set a public launch date. But once again, we got no explanation from the SEC. Instead, they opened a formal investigation.
The SEC says “we’re going to sue you” and Coinbase says “please can you be our lawyer and tell us why?”. Come on.
If you view the SEC as a customer care center, you’d be frustrated with their lack of transparency. But they’re not a customer care center; they’re a regulatory agency. When they say they’re going to sue you, you can assume their lawyers have taken a look at the same body of law as your lawyers, and their lawyers think a judge will agree with their perspective in the case of a disagreement—in this case, whether the crypto lending product is a security—and therefore it may be worth suing you if you don’t see things their way. And by the way, they’re not your lawyers, so they’re not going to advise you on the body of law that your lawyers should be advising you on.
Which is why I’m puzzled. Why are Coinbase’s CEO and CLO acting surprised that the SEC isn’t offering more details about their potential lawsuit? Surely it’s obvious they can’t be seen as giving Coinbase legal advice when they’ve made it clear they intend to sue them?
Who is Coinbase trying to convince with its positioning? Obviously not the SEC. Also probably not sophisticated institutional investors who know how lawyers work and why the SEC isn’t going to show its hand.
I’m guessing Coinbase’s audience are the same people to whom Coinbase is marketing its new crypto lending product. Which, by the way, has a pretty stellar pitch for its 4% APY account:
Pre-enroll today to earn interest on USD Coin (USDC), with rates more than 50x the national average of a traditional savings account. Best of all, your USDC is guaranteed by Coinbase, giving you peace of mind while you earn interest. Watch your interest grow in real-time through the lifetime rewards ticker in your portfolio and receive monthly payouts, all with no fees or withdrawal limits.
Sounds an awful lot like a savings account3, but with returns (4%!) that you can’t get from a traditional bank. With words like “guaranteed by Coinbase”, you might just think it’s as safe as an FDIC-insured savings account, too.
If you’re going to pitch your crypto lending product to consumers and make it sound like a bank, I wouldn’t be surprised when the Securities & Exchange Commission declines to offer legal advice while preparing to sue you.
I guess they were no longer friends/colleagues? Most of Trello users had free accounts, so it’s not terribly surprising that this happened.
This happened often enough that we eventually collaborated with Trello’s legal counsel to add the following paragraph to Trello’s help documentation:
Beyond what is outlined above, we can’t share information about accounts unless compelled to do so as a result of valid legal process.
In terms of what constitutes valid legal process, we can’t give legal advice about what that might mean for your specific circumstances. You’ll have to determine what is a valid legal process for your situation, possibly with the help of a lawyer or other legal counsel. For more information, please take a look at our Terms of Service. If your legal representative needs to get in touch with Trello, they can reach out to us at http://www.trello.com/contact, and we’ll forward their message to the appropriate party.
From Matt Levine in Money Stuff:
It must be tempting for Coinbase here to say “look this thing isn’t a security, this is just like a savings account at a bank, and that isn’t a security is it?” Which is quite right! But Coinbase obviously does not want to be regulated as a bank; it does not want to be subject to bank capital requirements (which require essentially 100% equity capital backing Bitcoin positions) or prudential regulation by bank regulators who like crypto about as much as the SEC does but have even more tools to crack down. You think the SEC is being annoying about not issuing formal guidance! A bank examiner could just call you up and say “we don’t think owning Bitcoin is a good idea, get rid of it,” and then where would Coinbase be?