A key question for regulators to answer: Are there points where cryptocurrency assets are sufficiently diversified to transition from securities to commodities?
These are the kinds of questions swirling around a largely unregulated $2 trillion industry that straddles U.S. financial markets without the transparency and investor protection enjoyed by the rest of the market. . Unregulated might have been fine for the crypto industry when it was a minor sideshow, but it is too big to ignore.
Understanding how to regulate cryptocurrency assets has made it difficult to identify key players such as market providers and participants, regulators and legislators. have different ideas. Congress has proposed multiple bills that would delegate the power to regulate the cryptocurrency market to existing regulators, such as the Commodity Futures Trading Commission (CFTC), or perhaps entirely new regulators. But while the industry exists in regulatory purgatory, the Securities and Exchange Commission (SEC) and CFTC are busy carrying out their duties and enforcing enforcement on the spot when they spot cryptocurrency scams. I’m here.
In a recent SEC lawsuit alleging former Coinbase manager Ishan Wahi, engaging in insider trading Using cryptocurrency assets generated a wave of reactions unrelated to the main allegations. In the lawsuit, the SEC lists nine of his cryptocurrencies, seven of which are traded on his Coinbase platform, which the SEC claims are unregistered securities. Coinbase is a publicly traded company that operates one of the world’s largest cryptocurrency exchange platforms.
The SEC’s move to classify these nine cryptocurrencies as securities has put on the nerves of other regulators, most notably the CFTC, which is lobbying Congress to give Congress the power to regulate crypto asset markets.
CFTC Commissioner Caroline Pham criticized the SEC’s move in the Wahi case as “regulation by enforcement.”
“The SEC’s allegations could have broad implications beyond this single case, highlighting how important and urgent it is for regulators to work together,” she said July 21. wrote to statement“Key issues are best addressed through notification and comment rulemaking under the Administrative Procedure Act and through a transparent process that engages the public to incorporate expert opinion and develop appropriate policies. Regulatory clarity comes from existing in the open, not in the dark.”
Joseph Sylvia, a member of law firm Dickinson Wright, characterized the SEC’s move as a “regulatory grip.”
“It’s a terrible way to put restrictions on something as unique and novel as cryptocurrencies,” he said. “I think the crypto industry is asking for guidance by saying, ‘If you know the rules, you can work by the rules.’ It’s disappointing that the SEC has not taken a more thoughtful approach.”
Philip Moustakis, an attorney at law firm Seward & Kissel, says if the SEC wants to sue someone it believes is involved in insider trading, it will need to prove that some of the assets are securities. said there was a need.
“I don’t think the SEC is doing anything behind the scenes by labeling the token a security,” he said. “They are going to file a complaint, and to do that they have to claim that the assets are securities.
Of course, Coinbase strongly disagrees with the SEC’s characterization of trading unregistered securities on its platform.
I read the headline “Coinbase does not list securities. End of story” July 21st blog post By Paul Grewal, the company’s chief legal officer.
“Coinbase has a rigorous process to analyze and review each digital asset before making it available on exchanges.This process was reviewed by the SEC itself,” wrote Grewal. “This process includes an analysis of whether an asset is considered a security and also considers regulatory compliance and information security aspects of the asset. It is not finally listed on Coinbase.”
Grewal said Coinbase cooperated with the SEC’s investigation, but that “instead of talking to us about the seven assets on the platform, the SEC jumped straight to the lawsuit.”
A few days later, bloomberg report The SEC is investigating the listing of unregistered securities on Coinbase’s platform. The SEC declined to comment on this report. Another cryptocurrency platform, Binance, plans to remove his AMP token from its platform by August 15th. wall street journalAMP is one of nine cryptocurrency assets classified as securities by the SEC in the Wahi case.
What we really need is for the SEC to get involved in the rulemaking process for cryptocurrency assets and explain as clearly as possible which cryptocurrencies are commodities and which are securities.
Jeffrey Alberts, former federal prosecutor for the Southern District of New York’s U.S. Attorney’s Office and now partner of Pryor Cashman, said: howie testbased on a 1946 Supreme Court case involving a citrus grove, to determine whether an asset is an investment contract and therefore whether security is an issue when applied to cryptocurrencies.
“The value of every asset in the world depends on the efforts of others,” Alberts said, citing one of the four main principles the Howey test uses.
“The concept here is where to put the line on whether an asset is decentralized or not. Figuring out where that line might be crossed requires an enormous amount of judgment.” He said, adding that so far the SEC has not been able to provide any clarity on the matter.
One case that has caught the attention of the cryptocurrency industry is Ripple Labs and its cryptocurrency XRPThe SEC claims this is an unregistered security. The lawsuit is still pending in federal court.
According to Greg Baker, a partner at Patterson Belknap, crypto assets and exchanges should either take a safer approach to registering crypto assets as securities or determine that assets qualify for an exemption from registration. There are few options for clarity in regulation, said Greg Baker, a partner at Patterson Belknap. Former SEC Enforcement Agent.
“Without Congressional action, the SEC’s only option is to file a lawsuit and have the court determine whether these assets are securities,” he said. “Unfortunately, that’s where we are now.”
Congress has proposed multiple bipartisan bills to regulate cryptocurrencies. Responsible Finance Innovation Act that is create a framework to regulate the industry Digital Goods Consumer Protection Act 2022proposes to give the CFTC powers to regulate the trading of digital goods, mandating “strict and consistent rules for all market participants.”
