Cryptocurrency has a problem with the SEC – and it has only gotten worse.
The Biden administration is taking a more hands-on approach to the highly volatile, little understood and barely regulated cryptocurrency industry. Cryptocurrencies are decentralized digital currencies secured by blockchain technology. Bitcoin, Ethereum, and other cryptocurrencies have become almost as accessible as government-issued currency in recent years, but the government offers them few consumer protections.
The Securities and Exchange Commission (SEC) — headed by Gary Gensler, who taught a course on cryptocurrency at MIT — is trying to argue that it can and will regulate any cryptocurrency investment programs it decides to come under its jurisdiction. The relative newness and rapid expansion of the cryptocurrency industry has put it in a regulatory gray area. The Internal Revenue Service (IRS) class crypto as property. The Commodity Futures Trading Commission (CFTC) considered crypto to be a commodity. And the SEC said that digital assets “may be securities, depending on the facts and circumstances”. A security is a financial asset that can be traded, such as stocks and bonds, and is governed by several laws designed to prevent fraud and protect investors.
The SEC appears to have decided that an upcoming offering from Coinbase, the largest cryptocurrency exchange in the United States, meets its definition of a security. And it shows that it will step in and regulate it accordingly – and, by extension, regulate the rest of the crypto finance industry more assertively.
Cryptocurrency exchanges allow people to buy and sell crypto. Coinbase is one of the largest in the world and recently went public. He planned to launch a program called To lend, which would allow investors to let others borrow a form of crypto from them called USDC, a “stablecoin” whose value is pegged to the value of the US dollar (a USDC is always supposed to equal and be exchanged for the value of one US dollar). In exchange, lenders would receive 4% interest on the loan, a rate much higher than what traditional banks currently offer on their savings accounts. This could have made the Coinbase Lend offer very attractive to consumers who otherwise would not have risked investing in crypto.
This is where the SEC came in, according to Coinbase. The company announced Wednesday (or late Tuesday, if you count a Twitter feed of CEO Brian Armstrong) that the SEC threatened to sue the company if it launched Lend, but that the agency would not tell Coinbase why it considered Lend a security, except that it did so “through the prism of decades Supreme Court cases. These cases, informally known as Howey and dreamsare the prism through which every potential security is consideredincluding crypto services. Coinbase said it wanted formal guidance from the SEC on how it used these cases to determine whether Lend was a security, but the SEC would not provide it.
The SEC has yet to officially comment, although some people believe this tweet can be considered a response.
The people behind Coinbase may be (or at least pretend to be) ignorant, but the SEC almost certainly knows what it’s doing here: asserting its regulatory control over the world of cryptocurrency banking and finance. And he does it with a pugnacity not typical of the agency, according to unnamed former SEC officials. who spoke to Bloomberg.
“The announcement that the SEC is investigating Coinbase’s Lend program is consistent with regulators’ continued aggression over crypto,” George Monaghan, analyst at market news firm GlobalData, told Recode.
As the The New York Times recently explained, cryptocurrency is moving into the banking industry, offering services that are typically reserved for traditional banks, whose services are backed by government-issued currency (the dollar, for example) and operate within laws and regulations. consumer protection regulations that date back decades. For example, some crypto companies are now offering interest-bearing crypto accounts, debit cards and credit cards with cryptocurrency rewards
Senator Elizabeth Warren called these “ghost banks” noting they are not federally insured and may be more vulnerable to hacks and fraud than traditional banks. She wrote to Gensler about her concerns and, in his answer of August 5, the SEC Chairman agreed that “investors using these platforms are not adequately protected.” He also said that the SEC can regulate certain activities and that he believes lawmakers should prioritize legislation related to crypto trading and lending.
The SEC has already shown interest in cracking down on crypto. He launched a crypto regulatory initiative in 2018, which became a freestanding office within the agency last December. And that recently loaded another crypto lending platform, BitConnect, with $2 billion in fraud for exploiting what the Department of Justice called a “classic Ponzi scheme”. Another crypto company, BlockFi, which offers crypto-backed high-interest loans and deposit accounts and a credit card with a crypto rewards program, was the object of investigations of several state-level security regulators.
But Coinbase is bigger and more publicized than these companies. GlobalData’s Monaghan did not expect the fallout to be significant for Coinbase itself, as the Lend program was not yet active. But the SEC’s interest in Coinbase is a sign for every crypto finance company that there are still rules to follow, and that they should expect consequences if they don’t.
These rules could be tightened in the near future as the Biden administration and lawmakers work to close the regulatory loopholes that cryptocurrency falls into. 2022 budget proposed by Biden included encryption statement requirementsthe taxman is crack downand crypto regulations have even become a temporary sticking point during the adoption of the infrastructure bill. Adding to this – or perhaps exacerbating it – is the question of how cryptocurrency can be used to facilitate criminal activity; ransomware attacks often require payment in bitcoin due to the difficulty in tracing these payments.
Crypto regulations are coming. The question now is whether the slow process of creating rules and passing laws will be able to keep pace with the rapidly changing world of cryptocurrency.