Crypto bosses say Coinbase is fighting the right fight

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Some crypto exchange bosses watched in horror last week as the CEO of Coinbase decided to accuse the Securities and Exchange Commission of “summary behavior.” Others, however, applauded.

The Twitter salvo from Coinbase boss Brian Armstrong reflected the growing anger of crypto entrepreneurs who argue that regulators are holding back innovation and have been too slow to come up with clear rules for the nascent digital asset industry.

“Coinbase is fighting the good fight. If they lose. . . the SEC will become even more aggressive. They will draw the lines to crypto territory, ”said Alex Mashinsky, managing director of crypto lending platform Celsius Network.

Tensions escalated when Coinbase revealed that the SEC had threatened to sue the exchange if it launched a product called Lend, designed to allow users to earn interest on certain digital assets on the platform. The company insists Lend is outside the regulator’s jurisdiction and the SEC has not explained its concerns.

On Tuesday, however, as U.S. Senators pressed for more guidance to be released, SEC Chairman Gary Gensler said existing law and Supreme Court precedents were clear.

He also complained about a lack of consumer protection in loan products in particular and said that Coinbase had not registered with the SEC “even though they have dozens of tokens that may be securities”.

The ongoing clash with the largest crypto exchange in the United States could help determine the extent of the SEC’s power over digital assets in the future, and has pissed off other crypto groups – particularly the growing number of platforms that also offer traders juicy returns of around 7-12%. on crypto deposits.

“This is regulation by application,” said John Collins, partner at financial technology consultancy FS Vector and former policy manager at Coinbase.

“These products are currently widely used across the crypto space. . . I would be very surprised if the companies responsible for the space don’t take the time to assess what they are offering if it is a [similar] product.”

The SEC clamped down on the initial coin supply market by pursuing enforcement action. In December, he sued crypto group Ripple for allegedly offering his XRP token as unregistered security. It also reached a settlement with Telegram, saying the messaging app made an unregistered securities offer of $ 1.3 billion.

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Likewise, at the heart of the fight between the SEC and Coinbase is whether Lend qualifies as a security under US law. Some argue that the crypto exchange’s guarantee to provide a return to all of its clients from its lending program brings it closer to defining a security under a US Supreme Court precedent called the Test of Howey, who states that an “investment of money in a joint venture with a reasonable expectation of profit from the efforts of others” is a guarantee.

Coinbase told the Financial Times that it did not know why this particular product had been targeted, given the existence of other similar offers.

The calls for clarity come as a growing number of crypto platforms have started offering yield-hungry traders complex – and very risky – interest-bearing products in an era of ultra-low interest rates. While products tend to be structured differently from issuer to issuer, the Coinbase dispute leaves many people wondering about their future.

“At the moment, we’re chair quarters guessing,” said Stephen Ehrlich, managing director of Voyager Digital, a Toronto-listed crypto exchange that offers a return on deposits to US clients.

Antoni Trenchev, chief executive of digital asset platform Nexo, said lawyers for his company were working on the presumption that “everyone in the industry will have the same questions” from regulators as Coinbase.

He said Nexo’s interest-bearing products do not break any rules, but added that the company is nonetheless exploring other options if Coinbase sues and then loses its case. These included “authorizing the sale of these products only to accredited investors” or entering into a partnership with a bank, for example, he said.

Coinbase said it was concerned about the similar products it offers due to lack of clarity. Celsius said he is confident that none of his offerings in the United States are in securities. Gemini, which offers 8% annual interest on its US dollar Gemini coin, declined to comment.

Rather than ditching loan products altogether or risking being sued, Coinbase and others have a third option: register their products as securities. It’s an approach Gensler has encouraged, saying crypto exchanges should be “asking for permission” rather than “begging for forgiveness.”

However, Voyager’s Ehrlich argued that, given the nuances of digital assets, that could prove difficult as well. “How could you explain crypto [as] nowhere does it say how to hedge digital assets? He said, pointing to a lack of clarity on the crypto audit.

The deadlock highlights a debate over whether it is better for digital assets to be subject to the existing regulatory framework or whether regulators should create a specific crypto regime, as has been done in some jurisdictions.

Gensler said Tuesday that “companies since the 1930s, for 90 years, have found ways to innovate” under the securities agency’s registration requirements.

But Isaac Boltansky, director of policy research at Compass Point Research & Trading, said, “We’re talking about trying to take a civil war era regulatory regime and put it on a very digital asset class. disruptive.

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