Two U.S. regulatory agencies that can’t agree who should be in charge of regulating crypto are both acting in completely different ways to try and oversee the industry. Only one of those agencies has gained the ire of the entire crypto field, specifically because it won’t back down from calling most digital asset trading “securities.”
The Securities and Exchange Commission is reportedly digging into beleaguered crypto exchange Coinbase’s past, specifically trying to identify whether the company was letting people in the U.S. trade digital assets when they went unlabeled as securities. Bloomberg reported based on three anonymous sources close to the matter that the SEC has poked harder into the crypto exchange since it started offering additional coins for trading on its platform. The platform allows users to trade over 150 different tokens.
The news comes less than a week after the SEC publicly announced they filed a complaint against former Coinbase project manager Ishan Wahi, claiming he had conducted insider trading by using knowledge of the platform’s public listings and offering tips to his brother Nikhil Wahi and friend Sameer Ramani. The two allegedly bought up at least 25 crypto assets, “at least nine of which were securities,” then sold the assets after the announcements to make a tidy profit of over $1.1 million from June of last year to this past April. They three were also charged with wire fraud conspiracy and wire fraud according to the U.S. Attorney’s Office for the Southern District of New York. It’s being called the “first ever cryptocurrency insider treading tipping scheme.”
But according to Bloomberg, the SEC had been investigating Coinbase even before it brought this recent complaint forward. For the company’s part, Coinbase’s Chief Legal Officer Paul Grewal wrote on his Twitter “we are confident that our rigorous diligence process—a process the SEC has already reviewed—keeps securities off our platform.”
The main Coinbase Twitter also linked a blog post from last week, where Faryar Shirzad, the company’s chief policy officer argued none of the supposed assets traded on Coinbase’s platform are securities. He claimed the company analyses whether an asset is a security based on the old Howey Test, an old SEC framework to determine if something qualifies as an investment contract.
But the SEC seems less concerned with what the company says its assets are and what they actually do. In last week’s release, SEC enforcement director Gurbir Grewal said “We are not concerned with labels, but rather the economic realities of an offering.” According to Bloomberg, the SEC decides a digital currency falls under their jurisdiction when it’s related to company funding and profiting from that company’s decisions.
This is such an important point that often gets missed when talking about crypto regulations. Despite crypto being around for over a decade, regulatory agencies are still trying to answer questions about the best way to handle digital currencies. Most of that is because lawmakers and other officials are too focused on the technical nature of cryptocurrencies, rather than the effect they currently have on both the market and on people who trade them.
The CFTC Would Rather Be Crypto’s De Jure Regulator
Back in June, a bipartisan group of senators pushed a new bill to create the first “regulatory framework” for digital assets. Despite the bill’s high-falutin aims at defining the limits of crypto, it also put most of the regulatory onus on the smaller Commodities and Futures Trading Commission rather than the SEC, essentially calling crypto transactions futures rather than securities. One thing that crypto proponents often try to relate is that the crypto industry is still young (a reminder, bitcoin has been around for 14 years) and that we’re still yet to see the true innovations blockchain tech can bring.
It’s no wonder then that the CFTC chief Rostin Behnam said yesterday at a Brookings Institution event they were creating a new office called the Office of Technology Innovation, replacing the agency’s old fintech team. As pointed out by Decrypt, the previous office was started by Christopher Giancarlo, who previously headed the CFTC under former President Donald Trump and after leaving the agency became an executive in multiple crypto companies. He’s known as “Crypto Dad” by the crypto proponents.
Of course, the SEC is also not impervious to the revolving door. Former deputy director of the SEC Christian Sabella was hired by Coinbase back in 2021.
So the CFTC and the SEC are locked in a battle of words over the very definition of crypto. After the SEC announced its inside trading charges against the ex-Coinbase employee last week, CFTC commissioner Caroline Pham called the case “regulation by enforcement,” further mentioning that “given the overriding public interest and the open questions on the legal statuses of various digital assets… the CFTC should use all means available to fulfill its statutory mandate.”
In an address made to the Nasdaq Technology of the Future Conference last month, Pham said while the SEC regulates securities markets, “the CFTC has regulatory touchpoints with virtually everything else” including anti-fraud and anti-manipulation over spot markets. She touted that the agency has brought over 50 crypto enforcement actions since 2015, adding that congress’ crypto regulation bill expanding the agency’s jurisdiction would promote U.S. competitiveness and “enable growth.”
Yet SEC Chair Gary Gensler has long argued that much of crypto falls under his jurisdiction, especially since there is billions of dollars in fraud happening yearly that actively harms retail investors. The SEC has previously claimed that their existing crypto enforcement branch has brought over 80 enforcement actions against the industry since 2017.
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