Coinbase, one of the world’s largest crypto exchanges, was sent a notice by the US Securities and Exchange Commission (SEC) warning that the regulator planned to sue, alleging the company had violated securities laws. Crypto assets, the SEC insists, are securities, and so fall under its jurisdiction. But on March 27, Binance, the world’s biggest crypto exchange, and its founder Changpeng Zhao were charged by a different regulator, the Commodities and Futures Trading Commission (CFTC), with breaking commodities laws—because, the CFTC says, popular crypto assets are commodities.
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That two different exchanges can be sanctioned by two different regulators for alleged violations of entirely different regulatory regimes shows the increasing complexity of the operating environment for crypto firms in the US, as a turf war between the SEC and the CFTC escalates. After the dramatic collapse of FTX in November 2022, both regulators have adopted a more aggressive—even hostile—approach to the crypto industry, using enforcement actions to stake their claim to jurisdiction.
“If people wondered what the attitude was at the beginning of the year, now they know it’s hostile,” says Mick Mulvaney, a former White House chief of staff and an advisor to crypto compliance platform Astra Protocol. “I don’t think FTX was the cause, as much as the excuse.”
Flurry of cases
Since the start of the year, the SEC has launched a flurry of cases against crypto companies and individuals in the US. In January, the regulator charged crypto exchange Gemini and crypto lender Genesis Global Capital over a service that allowed US customers to earn interest on their tokens, which the agency alleged was an unregistered securities offering. In a Twitter thread, Gemini cofounder Tyler Winklevoss called the charges “a manufactured parking ticket.” Neither Gemini nor Genesis responded to requests for comment.
In February, the regulator reached a settlement with another exchange, Kraken, which agreed to halt a service that gave US customers the ability to earn rewards for locking up their crypto. The regulator also issued crypto firm Paxos a warning of intent to sue over its BUSD stablecoin, which the SEC asserts is a security. In a statement, Paxos wrote that it “categorically disagrees with the SEC.”
Then in March, the SEC charged Justin Sun, founder of the TRON blockchain, with market manipulation, as well as eight celebrities—including the likes of Lindsay Lohan and Ne-Yo—with “illegally touting” Sun-related tokens without disclosing they were paid to do so. Sun did not respond to a request for comment.
Mulvaney says he thinks that the agency is “flexing its muscle” with enforcement actions as a way to strengthen its claim over the industry, but in doing so, has lost its impartiality.
Even within the SEC, there is disagreement over how the agency is handling crypto. Hester Peirce, one of five SEC commissioners, has dissented publicly against multiple crypto-related actions, in an effort, she says, to foster discussion and heal the “dysfunctional” relationship between the agency and the crypto industry.
“We haven’t done our job as a regulator. We have not provided a road to compliance, and instead have been bringing enforcement actions after the fact,” says Peirce. Even though the agency’s actions are motivated by a desire to protect investors, “the strategy is one of jurisdictional maximalization,” she says. “And one way to plant a flag is to bring enforcement action.”
The SEC’s tilt at the industry has been met by a refusal at the CFTC to yield jurisdiction. The agency’s lawsuit against Binance—by far the world’s largest crypto exchange, which has until now remained largely out of reach of US regulators—specifically refers to popular cryptocurrencies, including bitcoin, ether, and litecoin, as commodities.
In the absence of clear guidance from Congress as to whether the SEC or CFTC should take point on regulating the industry, crypto businesses must do what they can to anticipate possible complaints from both directions. But this is made difficult by the lack of crypto-specific guidelines from both agencies.
“It’s like driving down the road, with no signs or lanes, trying to figure out the rules based on who gets pulled over,” says Dave Siemer, CEO at Los Angeles–based crypto investment firm Wave Digital Assets. “You’re just guessing.”
Crypto companies say they’re particularly frustrated by the regulatory onslaught because they’ve tried to engage with the SEC and CFTC, and asked for clearer, more comprehensive rules of the road.
Speaking to WIRED, Paul Grewal, chief legal officer at Coinbase, claims his company’s interactions with the SEC have been more akin to “one-sided monologues” than dialogs. Attempts to help map out the parts of the crypto industry that do not fit within existing rule structures, he says, have largely garnered no response.
“Coinbase is not asking for special treatment. We want to be registered and held to strict standards,” Grewal says. “But the SEC has outright refused to promulgate basic rules, instead relying on a regime of regulation by enforcement.”
Gensler has called on crypto firms to register with the SEC, a process that would theoretically minimize the chances of retrospective legal action by ensuring they operate in compliance with the regulator’s expectations from the get-go. But the idea that registration is as simple as filling out an online form has inflamed tensions; Grewal says this characterization of the registration process is “simply not true” and that the few businesses that have tried to register have “failed miserably.”
If a business’s application is rejected by the SEC, it cannot offer securities-related services in the US, at least in the form described in its application. Because of confusion over the classification of crypto assets, this eventuality could pose an “existential threat,” says Siemer. “To go in and register means to cease to exist,” he says. “There is no framework; there is no path.”
The question of what crypto is could be resolved in the courts. An ongoing case between the SEC and cross-border payments company Ripple over cryptocurrency XRP, for example, is expected to go some way to clarifying whether cryptocurrencies should be treated as securities (and be regulated by the SEC) or not. After two years, a verdict in the case is near, but because it’s playing out in a district court, it will not establish binding precedent. However, a victory for the SEC would strengthen its case for becoming the de facto crypto regulator.
People in the industry say that a better resolution would be for the US Congress to put in place comprehensive legislation governing crypto. The European Union is on track to introduce broad-based crypto legislation in 2024, under the Markets in Crypto Act (MiCA), and countries like Japan and the UAE have also moved quickly, but the US lags behind. A number of crypto-related bills were tabled in the 177th Congress, but died when the latest session ended in December, and so will need to be formally reintroduced and debated again.
Mulvaney, who spent six years in the House of Representatives, says it is unlikely that anything resembling comprehensive crypto legislation makes its way through Congress this year, ahead of the 2024 presidential election. But the silver lining, he says, is that crypto is “bipartisan”—it appeals to libertarian beliefs on both sides of the political divide—which means the issue of legislation will not be settled along “tribal lines.”
“It’s tough to operate with no regulation, because you don’t know what you are,” says Mulvaney. “You don’t want to be over-regulated … but you need enough to give guidance and clarity. That’s the sweet spot.”
In some parts of the crypto community, the refusal of regulators to set clear lines has been interpreted as a deliberate attempt to squeeze the industry out of the US.
Irrespective of the intention, the consequence of continued ambiguity over the classification of crypto assets, the regulator in charge, and the process of registering services with the government is likely to be an exodus of crypto businesses from the country, say Mulvaney and Siemer.
In late March, Circle Internet Financial, issuer of the USDC stablecoin, announced plans to establish a European headquarters in Paris. According to a Bloomberg report, Coinbase is also plotting an offshore version of its trading platform. Grewal declined to confirm, but says the company is “paying careful attention to the growth of markets outside the US.”
A similar pattern is playing out among smaller crypto firms. Wave Digital Assets is preparing its own contingency plan, Siemer says. Although the company is not yet considering leaving the US, it has halted hiring in the country over concerns about the regulatory climate.
Peirce, the SEC commissioner, says the agency’s objective is to help enable safe experimentation with technology, not to push the crypto industry offshore. But she is sympathetic to the interpretation. “If you’re trying to send the message that you want crypto in the United States, but you want it to be compliant, the way to send that message is to help companies [to become compliant]. But we don’t see that happening,” she says.
“You don’t repair the situation by saying ‘come in and register’—because nobody knows what that means—but by bringing everyone into a room and having a conversation like adults.”
take from: https://www.wired.co.uk/