Coinbase, Base & Willful Non-Compliance

We first wrote in August 2023 about Coinbase’s then-new product base as a potentially non-compliant platform with a range of legal problems:

The basic problem was that Coinbase had total control over the base network and Coinbase, as a regulated entity with a number of licenses, was not allowed to operate a no-KYC custodial money transmitter. Those rules are fairly clear.

The launch announcement even admitted this:

base aims to be decentralized, permissionless, and open to anyone with the vision of creating a standard, modular, rollup agnostic Superchain powered by Optimism. We’re joining Optimism as a Core Dev on the open source OP Stack, and working to create a thriving community of other developers.

A companion piece made this even more explicit:

In 2023, we will work towards progressing Base and Optimism Mainnet from a Stage 0 rollup (as defined by Vitalik) to a Stage 1 rollup, with a significant level of decentralization and trustlessness.

In 2024, we will work towards progressing Base and Optimism Mainnet to Stage 2 rollups, with levels of decentralization and security comparable to Ethereum. We have an ambitious roadmap, but believe our embodiment of the web3 ethos of collaboration will get us there.

For those not familiar with the terms a Stage 0 rollup is 100% centralized without even a fig leaf. A Stage 1 rollup does something like placing absolute control with a board of directors that votes online. The argument is that Stage 1 rollups might be decentralized becuase they use computers unlike traditional financial services businesses that do everything on physical paper. It is really that dumb. Go read if you want.

Later in 2023 they wrote a long post again admitting the product was centralized and that they wanted to do something about it.

2025

In mid 2025 — not 2023 per the initial announcement, 2 years later — the project announced it had reached Stage 1. This product was still centralized and still had legal issues. Further, it was delivered 2 years late which raises the question of whether the team understood how to fix these problems when they launched or was just pretending to understand what was going on:

The only news on Stage 2, which was slated for 2024 in the original roadmap, was this:

We’re committed to further decentralizing and achieving Stage 2. We will continue taking steps toward that goal, including enabling the Security Council to provably detect and adjudicate bugs via the multi-proof system.

That was a soft commitment. It is not clear how much that commitment was worth.

Launching a non-compliant project in beta and planning to quickly remedy the problem may well be ok if you really knew how to fix the problem and then went ahead and fixed it promptly. That is open to debate — but it is a legitimate argument and reasonable people can disagree.

It is a completely different situation when the team does not know how to fix the problem at launch and plans to just sort it out later whenever they figure something out. If launching an outlaw business you wish to regularize later gives you a free pass to earn money from the outlaw business then, well, we’ve heard good things about the margins in all kinds of smuggling.

2026

Now in February 2026 Coinbase is abandoning any pretense a measure of decentralization was achieved. And it is abandoning the pretense that it will try to get there in the future.

First, notice that entire piece is written in the first person. Base is a “we” that sits inside Coinbase and runs the network. They are not referring to some nebulous community as “we.” How do we know? There are a few signs.

“We” changes the composition of the all-powerful security council:

In lieu of Optimism, we are adding an additional independent signer to the Base Security Council.

This did not happen through a public governance process or with any kind of voting. There is no token and there is no voting. “We” just changed the composition of the board of directors. This does not feel like the royal we except maybe in a vague sense:

“We” also will rearrange how the code works and who works on it:

Today, the code operating various components of Base, such as the sequencer, is owned by multiple teams and spread across multiple repositories, which adds coordination and maintenance overhead. Our unified solution, base/base, built on open-sourced components such as Reth, allows us to dramatically simplify the number of components, by optimizing them directly for our use case.

Those “teams” are Coinbase employees so this too is fairly clear. They even refer to this as a “unified solution.”

“We” will provide binary distributions (i.e. like Microsoft) and the network will require their node software:

We will ship one official distribution for each upgrade: a single Base binary for operating nodes on the network.

If you run a Base node, you will need to migrate to our Base client to remain compatible with future hard forks.

As a technical matter: yes it will be possible for other groups to write node software or compile the open-source components on their own. But because base has a thing known as a “centralized sequencer “ — this is part of the whole stages thing — even software written by third parties must accept the sequence of transactions chosen unilaterally by Coinbase. You can write your own code that agrees with everything they do. Or you can write your own code that spews endless error messages and cannot get transactions done. That is not freedom.

Finally, “we” has discretion to decide what gets done and who gets to contribute. How do we know? They say it clearly:

We’re open to new partners and libraries that improve performance, security, or decentralization, and we’ll work in public and contribute upstream so the broader ecosystem benefits.

That sentence can be translated as “we are open to using our total control over the system to bring new people onto the security council.” This is quite literally a group under common control. We know this is what they mean because it is what just happened with the security council. And we know they know they have this power because, again, Coinbase just exercised this power to achieve “In lieu of Optimism…” When the new President announces the old President resigned right before jumping out the window during an attempted arrest we all know what kind of governance procedures were employed.

This is, at best, trolling. But 3 years of trolling is starting to lean over into the general vicinity of willfully non-compliant.

Coinbase, Base & Willful Non-Compliance was originally published in ChainArgos on Medium, where people are continuing the conversation by highlighting and responding to this story.