Why SEC crackdown on Coinbase could level the playing field on crypto

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The regulatory non-intervention stance that the United States Securities and Exchange Commission (SEC) has long taken on cryptocurrency management appears to be coming to an end.

Coinbase co-founder and CEO Brian Armstrong made public on Tuesday the battle he says the SEC has now chosen with his company’s loan product. In a lengthy Twitter thread, Armstrong recounted his attempts to work with the SEC to explain how the company’s clients could earn interest on their crypto assets. After months of open dialogue, Armstrong claims the SEC ended the talks and threatened to sue Coinbase if they launched the service.

At the heart of Armstrong’s problem is the fact that other crypto platforms already offer interest on crypto assets, in the same way that banks pay interest on cash deposits. In his thread attacking the SEC for what he called “sketchy” and behind-the-scenes intimidation tactics, Armstrong also lamented that “many other crypto companies continue to offer a lending feature, but Coinbase does ‘is somehow not allowed to do that’.

But the question of exactly what the SEC sees above and below the map in the crypto space has been bubbling up for years. The agency has seized opportunities to define more clearly what could be security in crypto, going so far as to say that bitcoin and ether, the two largest cryptocurrencies by market cap, are probably not securities. When it comes to stablecoins, the cryptocurrencies that maintain a peg to the dollar or other base currencies, the SEC hadn’t made this a priority before. The Federal Reserve, however, had sounded the alarm about the impact a stablecoins race could have on the traditional financial sector.

Wall Street veteran Caitlin Long, now also the founder and CEO of Avanti Bank, one of the first crypto platforms to win a banking charter, told Yahoo Finance that while the SEC had not challenged companies offering an interest in cryptography before. That’s not to say they wouldn’t want to make an example with Coinbase.

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“We’ve seen that with the SEC before. They’ll pick a ‘problem kids’ or two if you want,” she told Yahoo Finance Live. “Usually his cases are easy to win in court and that is how they move the market from an enforcement standpoint.”

Example of setting

This could be a problem for companies like BlockFi and others, which have already offered paid accounts to crypto holders for years. BlockFi, which offers interest rates at around 120 times the national savings rate at most banks, recently encountered problems with smaller regulators over claims that these accounts also qualified as securities. New Jersey hit BlockFi with an enforcement measure to stop offering interest accounts to new customers. Other states followed suit this summer, as the company defended its accounts as legal.

What is perhaps more problematic, however, is the example he sets in trying to work with the SEC to follow the rules, Long says. Facing the threat of a lawsuit after months of dialogue with the SEC isn’t exactly inviting other people in crypto to work to seek approval from the agency.

“If you take Brian Armstrongs’ word that they were in contact with the SEC for six months and all of a sudden the door closed, those of us in the industry, including my company, who Actively seeking regulatory clearance before we do things we have more problems than those who simply ignore the law and go ahead, ”she said. “And frankly, the joke is on those who are trying to get regulatory approval right now because it really hasn’t been gotten.”

Suddenly, the proverbial regulatory ax could fall. SEC Chairman Gary Gensler has a few months under his belt since being sworn in in April. Whether or not it continues to use litigation as its preferred form of regulation could set the tone for all cryptos, not just giants like Coinbase.

Zack Guzman is a presenter for Yahoo Finance Live as well as a senior writer covering crypto, cannabis, startups and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.

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