This past week the Securities Exchange Commission sent a ‘Wells Notice’ to Coinbase, letting them know that the SEC is likely to bring an enforcement action. It’s not exactly clear what the charges will be, but
- The SEC approved Coinbase to go public in 2021
- But has now decided that crypto exchanges are illegal
- They’ve specifically decided that crypto staking is a security, which requires registration, but the SEC hasn’t allowed registration
Coinbase says everything they do was already approved by the SEC, and those documents included discussion of crypto staking. To the SEC, that was all true when crypto was going up. Now it’s going down. Crypto isn’t so popular. So they’re engaged in enforcement not ex ante to protect consumers but ex post after many participants in the market have already blown up.
3/ While we understand that this is all part of the journey to reforming our financial system, we are right on the law, confident in the facts, and welcome the opportunity for Coinbase (and by extension the broader crypto community) to get before a court.
— Brian Armstrong (@brian_armstrong) March 22, 2023
There are two separate rule of law issues here. One is the obvious, the government said something was ok so Coinbase did it, and then the government says it isn’t ok after the fact and goes after them for having done it. The difference here is that the SEC was fine with Coinbase right before Gary Gensler became chair of the SEC, and not fine after.
The other is ‘regulation by enforcement action’ – instead of clearly laying out what the rules are, and offering a process that allows following the rules, they’re just going after companies for violating them. We’re supposed to figure out what’s not allowed by what the SEC prosecutes.
None of these violations of the rule of law should be new to anyone that watches aviation, however. We’ve already been watching it play out in anti-trust enforcement. Just look at the Department of Justice suing to unwind the American Airlines alliance with JetBlue.
- The Department of Transportation entered into an agreement to approve the “Northeast Alliance” between American Airlines and JetBlue, indeed wrung concessions out of the two airlines before doing so (giving up takeoff and landing slots in New York, and a commitment to expand supply of seats in the market with larger aircraft under penalty of losing even more slots to other airlines).
- Then, after the alliance moved forward, the Department of Justice after the statutory deadline to object to the deal had passed. It was approved by default, but DOJ opposition remained a stalking horse for DOT to use.
Cranky Flier did a good job looking at the data and American really hasn’t seen higher fares in New York from the alliance. They don’t have pricing power there. Not only didn’t the government have new information since approving the combination, the information that there has been supports that it hasn’t been anti-competitive.
It’s hardly the first time we’ve seen the government use the anti-trust process to wring concessions that really aren’t competition related, either. When it entered into a deal to approve US Airways taking over American Airlines there were concessions involving slots and gates in markets that would otherwise see increased concentration … but also forcing American Airlines to exit the Dallas Love Field market where no concentration would occur, since US Airways didn’t even have a presence.
The federal government also intervened at Dallas Love Field to reduce competition when it required the destruction of gates and limits capacity, reducing competition. It even required the airport to accommodate Delta flights there – allowing them to squat on gates leased by another airline. The law is what they say it is at any given time, which is why Delta even thought they had a shot at getting the U.S. to abrogate treaty obligations with the United Arab Emirates and Qatar by limiting the flying their state carriers could do to the U.S.
Of course if the government were actually concerned with promoting competition in the airline industry – rather than, in the case of opposing JetBlue-American, doing Delta’s bidding – they would replace slot restrictions with congestion pricing; clamp down on gate squatting on the part of incumbent airlines at government-owned airports; allow foreign-owned airlines to compete in U.S. markets and numerous other policies that would actually introduce competition.