Imagine you're on your favourite bike path, one you ride to work every day. There are no stop signs or red lights along the way, so you pedal happily without any worries. But one morning, as you're cycling along, you suddenly spot a huge, bright red stop sign right in your path. Confused, you quickly brake to a halt.
Later that day, you come home to find a letter in your mailbox. It's from an organisation that helps keep things safe on the bike path. You're surprised to read that they're telling you to pay them a bunch of money. They say it's because you didn't stop at that new stop sign this morning and every other morning before that.
It might seem a bit funny, but this is kind of how the SEC is dealing with crypto rules in the United States. They're making new rules and expecting people and companies to follow them, even if these rules weren't very clear before. That's what we're going to talk about in today's article about the SEC and Coinbase.
An Overview of SEC
The U.S. Securities and Exchange Commission (SEC) created by Congress in 1934 is like a guardian for financial markets in the United States. Just like how referees make sure that everyone plays fair in a game, the SEC makes sure that companies and people follow the rules when it comes to money and investments.
The SEC is led by a group of five commissioners chosen by the president, with one of them serving as the chair. Each commissioner's term spans five years, and if necessary, they can continue for an extra 18 months until a new person is chosen. Currently, Gary Gensler holds the position of SEC chair, having assumed office on April 17, 2021.
SEC’s job is to set rules and regulations covering trading of securities. But what are securities? Securities are financial assets that people buy to make profits. Some of the things the SEC categorises as securities include: Stock, Bonds, Mutual funds, Investment contracts, derivatives, and Exchanged-Traded Funds (ETFs)
This SEC job encompasses securities exchanges, brokerage firms, dealers, investment advisors, and investment funds.
Now the question on your mind is -- Is cryptocurrency a security? Let’s dive right into that
Does Crypto Fall Under Securities
A lot of regulatory discussions have happened on whether cryptocurrencies should be categorised as securities, commodities, currencies, or something else entirely. At present, this question remains largely unanswered.
Should cryptocurrencies receive the designation of commodities like natural gas or coffee, then the main regulator would be the Commodity Futures Trading Commission (CFTC). This entity oversees currency trading and would encompass crypto trading if cryptocurrencies were to be considered currencies.
However, if consensus among lawmakers and regulators leans toward classifying cryptocurrencies as securities, then the Securities and Exchange Commission (SEC) would be responsible for oversight.
Gary Gensler, the current SEC Chair, has been firm in his view that the majority of cryptos should be seen as securities. While addressing Congress, Gensler emphasised the need for all relevant companies to comply with the law, stating, “Until they do, we will continue to pursue them as the cop on the beat, and investigate and follow the facts and law.”
Nevertheless, Gensler has singled out Bitcoin as an exception, classifying it as a commodity.
If Bitcoin is a commodity, what does that make of other cryptocurrencies?
The SEC vs Coinbase
This is not the first battle between the SEC and crypto. We’ve seen the SEC vs Ripple (XRP) case, a battle that went on for about three years until recently when a judge ruled that XRP is not a security. The case is still ongoing though as the SEC is filing an “interlocutory appeal” against the decision.
The SEC also filed a case against one of top crypto exchanges, Binance, about trading securities although a compromise was reached between the two parties. At almost the same time, the SEC filed a case against a top crypto exchange in the U.S, Coinbase that it’s operating as a combined exchange meaning it’s operating as a broker, an actual exchange and a clearing house.
The SEC asserted that Coinbase combined these functions and has failed to register as either a broker exchange or clearing house. To make it even worse, the SEC accused Coinbase of doing this to evade regulatory scrutiny and disclosures that come with registering. That’s from the SEC to a public listed company where all dealings are made accessible to the public.
All of these is kind of expected from what Gary Gensler said to Congress but what’s not is the decision to accuse Coinbase of offering brokerage services via its non-custodial digital wallet, the Coinbase Wallet. Just because Coinbase wallet enables swapping of tokens categorised as securities by SEC on Decentralised Exchanges (DEXs) and also staking of these tokens.
The regulator's move to pinpoint certain tokens as securities adds another interesting layer to the battle against Coinbase. Among the tokens on this list are SOL, ADA, MATIC, FIL, AXS, SAND, CHZ, FLOW, ICP, NEAR, VGX, DASH, and NEXO. At this point one would think The SEC is just throwing punches at anything and everything other than Bitcoin.
Coinbase has asked a judge to dismiss the case citing that crypto does not fall under SEC’s jurisdiction. The verdict from this case could make or break the crypto space. While we await the verdict, let’s ponder on whether the SEC is actually fighting to protect us, or are they fighting in their own best interest.
Regarding the SEC complaint against us today, we're proud to represent the industry in court to finally get some clarity around crypto rules.
— Brian Armstrong ????️ (@brian_armstrong) June 6, 2023
Remember:
1. The SEC reviewed our business and allowed us to become a public company in 2021.
2. There is no path to "come in and…
Final Words
The SEC vs Coinbase case is not just a legal dispute, it's a reflection of the ongoing struggle between innovation and regulation. As the industry matures, it's vital for regulators and innovators to engage in open dialogue and work towards a regulatory framework that nurtures growth while safeguarding investors. The outcome of this case could set a precedent influencing the course of crypto.
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This article is intended for educational purposes and is not financial advice.
