Is Crypto Regulated, or Not?
“I don’t believe in any kind of ‘gotcha’ regulation, where the rules are constantly changing on people and they don’t know what they’re supposed to be doing,” said Caroline Pham, Commodity Futures Trading Commission (CFTC) Commissioner, in the wake of the Securities and Exchange Commission’s (SEC) insider trading allegations against a former employee at Coinbase.
But ‘gotcha’ regulation is exactly what this feels like. What a time it is, indeed, for companies, traders, and participants in the crypto-ecosystem who want to avoid regulatory trouble.
Foreshadowing Coinbase’s fate: OpenSea
On June 1, 2022, the US Justice Department announced its first ever digital asset insider trading charge against a former OpenSea employee for allegedly using, “his advanced knowledge of what NFTs would be featured on OpenSea’s homepage for his personal financial gain.”
The US District Court for the Southern District of New York brought the charges against OpenSea — and just a short six weeks later, against former Coinbase employees. Moving at rapid pace, this second digital asset insider trading charged that a, “former Coinbase employee allegedly tipped his brother and friend regarding crypto assets that were going to be listed on Coinbase exchanges.”
What this means for regulation
“Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street,” said Damian Williams, District Attorney for the Southern District of New York. The SEC agreed. In a 62-page complaint filed by the SEC, they outline how nine different tokens qualify as securities, as defined by the Howey Test. Unlike most complaints filed, the SEC dedicated several pages of the complaint to describing how, exactly, those digital assets are securities.
Coinbase’s chief legal officer, Paul Grewal, wrote a fiery challenge in response to the SEC’s allegations. The title:
“Coinbase does not list securities. End of story.”
He continues, arguing that, “Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform. None of these assets are securities. Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed.”
A frequent criticism of the SEC is that it frequently fails to provide clear regulatory guidelines for issuers. The counter argument claims that plenty of laws and regulations in place already, such as the Howey Test, provide sufficient evidence for how securities laws apply to digital assets. It is likely the SEC is just beginning, and future guidelines and actions will be taken to provide clarity on crypto’s regulation as a security, if there will be any at all.
The chair of the SEC, Gary Gensler, has been transparent about his stance: cryptocurrency exchanges should register with the regulator as national securities exchanges.
The Department of Justice (DOJ), SEC, and CFTC all seem to have different stances on whether digital assets qualify as a security. If the DOJ consider cryptocurrencies a security, they likely would have charged the Coinbase defendants with securities fraud as well, but didn’t. And the CFTC Commissioner Pham called the SEC’s complaint “regulation by enforcement” and even suggested that tokens may not be securities, in a blatant contradiction to the SEC’s filing.
Attempting to clear this regulatory storm, Coinbase has petitioned the SEC to clarify working guidelines for cryptocurrency regulation. According to the post, Coinbase “calls on the SEC to develop a workable regulatory framework for digital asset securities guided by formal procedures and a public notice-and-comment process, rather than through arbitrary enforcement or guidance developed behind closed doors.”
It is likely that these cases are just the beginning. A crackdown on misconduct in the digital asset space is on the horizon, and hopefully some regulatory clarity will follow suit. Regulatory clarity will benefit the crypto market, create accessibility, and reduce speculation around crypto’s sustainability.
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