The US Securities and Exchange Commission (SEC) took a significant step by advising Coinbase, a well-known cryptocurrency exchange, to stop trading in all cryptocurrencies except for bitcoin. This move was made before the SEC filed a lawsuit against Coinbase for not registering as a broker, indicating the agency’s intention to broaden its regulatory control over the crypto market. Brian Armstrong, the CEO of Coinbase, revealed that the SEC suggested this action before initiating legal proceedings against the company. The SEC’s case specifically labeled 13 cryptocurrencies on Coinbase’s platform as securities, which meant that offering them to customers brought the exchange under the regulator’s oversight.

Interestingly, the SEC’s earlier request for Coinbase to remove over 200 tokens from its offerings, except for bitcoin, signals a broader push by the SEC, led by Gary Gensler, to extend its authority over the crypto industry. According to Armstrong, the SEC conveyed their view that all assets apart from bitcoin should be treated as securities. Coinbase questioned this interpretation, but the SEC remained firm and insisted on delisting these assets. If Coinbase had complied, it could have established a precedent that potentially rendered most US crypto businesses operating outside the law unless they registered with the SEC. Armstrong emphasized that such a decision would have practically marked the end of the crypto industry in the US. Faced with this situation, Coinbase chose to go to court to seek clarity.

The regulation of the crypto industry has been unclear, with the SEC and the Commodity Futures Trading Commission (CFTC) vying for authority. While the CFTC sued Binance, a major crypto exchange, earlier in the year, the SEC followed suit a few months later. Gary Gensler has expressed his belief that many cryptocurrencies, excluding bitcoin, should be considered securities. The recommendation made to Coinbase indicates that the SEC is now implementing this interpretation in its regulatory efforts. Notably, the second-largest cryptocurrency, Ether, was not part of the SEC’s case against Coinbase, and it was also absent from the list of “crypto asset securities” mentioned in the SEC’s lawsuit against Binance.

The SEC clarified that its enforcement division didn’t formally request companies to delist crypto assets. Instead, it shared its perspective on conduct that might raise concerns under securities laws during investigations. While traditional financial instruments like stocks and bonds are within the SEC’s jurisdiction, there’s ongoing debate on whether crypto tokens should fall under its oversight. If the SEC takes charge, it would impose stricter compliance standards. However, this poses challenges as crypto exchanges often provide various services that SEC-regulated companies can’t offer.

This regulatory shift has significant implications. Many American companies have built their operations around the assumption that crypto tokens aren’t securities. If they’re now informed otherwise, they might need to halt their operations. The future of public offerings and retail trading involving tokens might require intervention from Congress, as suggested by legal experts. As for the wider impact on the industry, the SEC hasn’t commented on the potential consequences of a settlement in which Coinbase delists all tokens except bitcoin.

August 2, 2023
Delino Gayweh
Serrari Financial Analyst

photo source Google