Editor’s Note: Mergers & Money is a monthly column by senior journalist Chris Metinko that covers deals and venture capital flows.
Although crypto has historically tried to evade certain labels, such as “trendy” or “fad”, the industry seems ready to receive one from the US government.
While most people are obsessed with the steep declines that cryptocurrencies have experienced during the current “crypto winter,” perhaps the most interesting industry turnaround occurred last month. last when the US Securities and Exchange Commission filed an insider trading complaint against a Coinbase manager and two others who declared nine digital assets on the exchange were securities.
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Why is this important? Because it made what was murky even more opaque regarding how the US will classify crypto and which agency will regulate it.
Goods against security
It is probably important to have a cursory understanding of the differences between commodities and securities before delving too deep into why crypto matters.
Simply put, a security produces a return from a common business or company. Commodities are generally a “commodity good” that can be bought, traded or traded – think grain, beef or gold. Commodities are often considered stores of value because they retain their value over time, unlike, for example, shares of Webvan at the time, which were securities.
Certain crypto assets such as Bitcoin certainly share the characteristics of a commodity. They are inherently designed to be decentralized and therefore do not produce returns from a joint venture or company. Cryptocurrencies were also created as something that can replace cash, like the US dollar, making it a store of value.
These characteristics led to the regulation of cryptography by the Commodity Futures Trading Commission— not the SEC.
This position only seemed to be reinforced by new bills such as this month’s Digital Products Consumer Protection Act 2022 and the Responsible Financial Innovation Act announced in June, which aims to impose new regulations on the growing digital asset space, but would apparently keep the industry under the tutelage of the Commodity Futures Trading Commission.
So what’s up with the SEC and Coinbase?
This is what makes the SEC accusations relevant to the industry. SEC President Gary Gensler has issued stern warnings and has expressed skepticism about the digital asset market in the past. While agreeing that Bitcoin is a commodity, Gensler points out that things like initial coin offerings bear more than a passing resemblance to securities since they are attempts to raise capital for a company or project.
Being seen as a security could change the industry. Commodities are generally considered less regulated, while securities require greater transparency and reporting from companies in this market.
For this reason, the general sentiment is that it would be a win to keep the crypto under the CFTC advisory.
For its part, Coinbase has made its stance on the SEC action clear.
“Coinbase does not list securities on its platform. Period.” wrote Coinbase’s Chief Legal Officer Paul Grewal in a blog post after the SEC announced charges.
The SEC’s action even caught the attention of CFTC Commissioner Caroline Pham, who tweeted that the action was “a stark example of ‘regulation by enforcement'” by the SEC.
“The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is for regulators to work together,” she added.
Where we are
No one can guess where the SEC action and increased discussion this year on crypto and regulation is leading. However, it seems likely that the discussion of how crypto and digital assets are defined and categorized has only just begun.
“I think this is the start of this debate about how it will be regulated,” said William Powers, a partner at Nossaman LLP who has worked with crypto advocacy groups regarding lobbying compliance.
Powers said crypto regulatory bills have been proposed, President Joe Bidenit is Executive Decree on crypto from March requested a report from all relevant government agencies on the future of money and payment systems, so the conversation is still evolving.
It’s also possible that crypto doesn’t fit any definition and needs to be regulated in a different way, which many in the industry believe. Even Gensler said earlier this year, his agency considered how to share industry oversight between the SEC and the CFTC.
While that might make sense, the two agencies are overseen by different Senate committees, which can be a difficult road to navigate.
One thing is certain, from investors to founders to anyone else in the crypto field, almost everyone would just like to know the rules to follow, whether it’s a title or a business. ‘merchandise.
Investors, for example, hate uncertainty. While the crypto-venture market has remained robust this year, with over $10 billion invested so far, according to Crunchbase Data— those in the market would no doubt like answers sooner rather than later.
“The common theme is that people want clear rules,” Powers said. “They want to know which definition applies. They want clarity.
Drawing: Dom Guzman
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