Coinbase’s SEC Petition Opens New Can of Crypto Regulation Worms

The hardest thing to understand about Nasdaq-listed cryptocurrency exchange Coinbase’s new petition asking the U.S. Securities and Exchange Commission to begin writing the rules to regulate digital assets isn’t its timeliness, even though it is at least a year past its sell-by date — or a year too early, depending on who you talk to.

Rather, it’s really who Brian Armstrong, CEO of the now-No. 2 U.S. crypto exchange, is talking to. And it raises a question: Is he shooting himself in the foot?

While the petition, launched on July 21, asks the U.S. securities regulator to begin a public discussion about what a regulatory framework for cryptocurrencies should look like, its 30 pages and 50 questions for the SEC to answer comes down to two requests:

• Write rules explaining what makes a cryptocurrency a security or a commodity.
• Write rules that eliminate or replace the parts of the traditional equities-focused code that simply do not work with cryptocurrencies’ blockchain-based technology.

Which is fine and dandy, especially No. 2, which gets into the nuts and bolts of how to amend or add to the securities code to fix problems. Among the biggest sticking points is the equities-focused requirement that all transactions be cleared through a registered clearing agency that could rope in blockchain miners and stakers — a problem that caused 99 senators to try and amend the trillion-dollar infrastructure bill in November after the crypto industry flexed its lobbying power for the first time.

See here: Crypto’s Influence Shows as Treasury Promises Protection for Miners, Stakers

Take the Win

However, No. 1 ignores several things, notably the fact that SEC Chairman Gary Gensler answered the question a long time ago (in his opinion almost all are securities) and that he’s losing the securities vs. commodities war in Congress.

“The fact is, most crypto tokens involve a group of entrepreneurs raising money from the public in anticipation of profits — the hallmark of an investment contract or a security under our jurisdiction,” Gensler said in April.

And as he’s a former chairman of the Commodity Futures Trading Commission (CFTC) and spent several years teaching crypto and blockchain at MIT, Gensler knows the industry and technology inside and out and is not about to change his mind.

Beyond that, it pushes the public argument back from are cryptocurrencies securities — and the industry’s opinion that almost all are not, which is winning hearts and minds on Capitol Hill, where senators Cynthia Lummis (R-Wyoming) and Kristen Gillibrand (D-New York) are leading the charge for legislation that would create a broad regulatory framework for crypto that would give the CFTC the lion’s share of the responsibility for oversight.

See also: Bipartisan Bill to Give CFTC More Power Over Crypto at SEC’s Expense

But the push hasn’t gained much momentum —Lummis and Gillibrand admitted this week the bill would not pass in this session. What’s more, the debate could be reframed in September, when the crypto regulatory framework proposal ordered in President Biden’s executive order is due.

By arguing that “the crypto securities market is waiting to be unlocked,” and that the “SEC has thus far been unwilling to write new rules for crypto securities,” as Coinbase’s Chief Policy Officer Faryar Shirzad did in the blog post that accompanied the petition launch, the exchange may well be putting the advantage back in Gensler’s camp.

Talking in detail about the details crypto securities regulations should include is a public conversation for last year, before there was any serious opposition outside of the crypto industry to Gensler’s position — or for 2023, if and when some version of the Lummis-Gillibrand bill passes.

Fighting in Court

Besides, the SEC doubled down on its crypto-as-securities argument on July 21, when it announced the crypto exchange industry’s first insider trading indictment — of a Coinbase manager and two friends, as it happens — and in doing so defined nine cryptocurrencies as securities.

While that may not seem very relevant, this is the first time the agency has listed specific tokens as currencies directly rather than through the backdoor by announcing a settlement with the firm that sold or created it, CoinDesk noted.

That led one CFTC commissioner, Caroline Pham, to tweet out a statement calling the SEC’s action “a striking example of ‘regulation by enforcement.’”

See also: SEC’s ‘Backdoor’ Approach to Crypto May Cost It Power

The comment, echoed by others from CFTC Chairman Rostin Behnam, shows just how deep the opposition to Gensler’s definition goes.

So starting a conversation about the extensive rulemaking needed to properly regulate cryptocurrencies that are security tokens could probably wait until the term is better defined.

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