Crypto investors wary as fight against Coinbase intensifies, circle of regulators

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A storm is brewing between the burgeoning cryptocurrency industry and regulators tasked with overseeing a hot-heated industry, where potential risks to investors are proliferating almost as fast as new products.

Tuesday’s Senate testimony from new Securities and Exchange Commission chairman Gary Gensler did little to shed light on a number of crypto-related controversies, including an evolving battle with Coinbase ( COIN), the premier crypto trading platform trying to offer a new lending product.

However, the SEC chief was faced with pointed questions about how far the agency was prepared to go in enforcing order in the Wild West of commerce and product creation in a digital currency sector. which prides itself on decentralization, efficiency and empowerment of small investors.

For its part, Gensler said that “this asset class is rife with frauds, scams and abuse in some applications. We can do better.” This point was illustrated on Monday, when a fraudulent press release touting a partnership between Walmart (WMT) and Litecoin (LTC-USD) moved the market before the retail giant took it down.

The SEC is set up to promote investor protection, facilitate capital formation and everything in between, according to Gensler. In recent months, the SEC has gone on the offensive to prosecute alleged bad actors in the crypto space.

On Monday, the agency charged three media companies with illegal offerings of digital assets and stocks. In early September, they fined crypto lending platform BitConnect and its senior executive $ 2 billion for fraud. And the previous month, the SEC billed Poloniex, a crypto exchange, $ 10 million for operating an unregistered exchange that sold digital securities.

The story continues

Regulators “are aggressively attacking cryptocurrency companies that use enforcement cases and send the signal that they are monitoring the industry very carefully,” Reena Aggarwal, director of the Center for Financial Markets, told Yahoo Finance and Policy of Georgetown.

Coinbase and “regulation through litigation”

Employees of Coinbase Global Inc, America’s largest cryptocurrency exchange, watch their listing appear on the jumbotron Nasdaq MarketSite in Times Square in New York, United States, April 14, 2021. REUTERS / Shannon Stapleton

However, tensions between regulators and industry players are growing, as illustrated in a viral Twitter post from Coinbase CEO Brian Armstrong last week. Friction between Armstrong and the SEC centers on Coinbase’s plans to launch a crypto lending product, Coinbase Lend, later this year.

With a proposal offering a 4% Annual Percentage Return (APY) on a USD coin (USDC), a stable coin pegged to the US dollar, the loan proceeds are lower than other crypto lending firms according to what. Armstrong revealed on Twitter. However, the SEC has always classified the product as a stock.

The Coinbase chief isn’t the only one challenging regulators. Other players in the crypto market have publicly expressed their frustration with the SEC, which has also reportedly polled the popular decentralized finance (DeFi) platform UniSwap.

This is how the SEC regulates, Caitlin Long, a Wall Street veteran who is currently CEO of crypto-banking startup Avanti Financial, told Yahoo Finance in an interview.

They will try to move a whole market by taking an example. What is interesting and frustrating for us in the [crypto] industry is that the industry has collectively been asking the SEC for clarification on some of these issues for years, ”she added.

They don’t provide a lot of proactive advice, but rather let the founders read the tea leaves based on the applications … But the applications are patchy and scattered.Nic Carter, crypto investor

Long and others have criticized this approach, calling it “litigation regulation”. Aggarwal of Georgetown and those of Capitol Hill pointed out that it is not clear whether the SEC has the power or the resources to regulate other parts of the market, such as fees associated with crypto exchanges.

“In terms of funding, we could use a lot more people,” Gensler admitted Tuesday. “There are 6,000 projects. Some of them are commodities, many of them are titles under the law and many platforms are.”

While it remains difficult to determine the SEC’s next actions in the crypto industry, the greatest concern expressed by advocates and politicians in Washington who disagree with Gensler is that the current approach of the committee lacks clarity.

Jennifer Schulp, former FINRA lawyer and current director of financial regulation studies at the Cato Institute, said a key issue Gensler exposed this week is that determining whether a digital asset is security remains far from clear. .

“Gensler’s assertion of authority is based on many assumptions about the facts and circumstances of a myriad of assets,” Schulp told Yahoo Finance.

“This lack of clarity, coupled with the SEC’s insistence on integrating these assets into an ill-suited securities regulatory framework, risks hampering innovation to the detriment of so-called investor protection,” a- she added.

Representations of Bitcoin, Ethereum, DogeCoin, Ripple, Litecoin cryptocurrencies are placed on the PC motherboard in this illustration taken on June 29, 2021. REUTERS / Dado Ruvic / Illustration

Nic Carter, partner at crypto-focused venture capital firm Castle Island Partners, said the SEC’s current regulatory framework for crypto assets is quite fair, but there is much more to be desired. .

“They don’t provide a lot of proactive advice, but rather let the founders read the tea leaves based on the applications… But the applications are patchy and scattered,” Carter explained.

Other companies engaged in the crypto lending business, such as crypto wealth management company Abra, avoid regulatory oversight by using a “banking trust-based model to deliver a return on crypto custody,” the CEO Bill Barhydt at Yahoo Finance in an interview this week.

This more secure approach includes Know Your Customer (KYC) protocols through a Nevada-based chartered trust company called Prime Trust.

“All users go through the integration for these trust accounts through the Abra app. Interest (yield) on crypto holdings, including Bitcoin, Ethereum, and USD stablecoins, is paid through Prime Trust,” a door said. – Abra’s speech.

Prime Trust is a chartered trust company regulated by the Office of the Banking Commissioners of the Financial Institutions Division. Their clients also include crypto exchanges such as Kraken and Binance.US.

Abra clashed with the SEC over a year ago, when the regulator fined the company $ 300,000 for offering its clients tokens reflecting the performance of stocks and shares of exchange-traded funds ( AND F). Large exchanges such as FTX have been successful in offering token stocks by not making them available to US investors.

With now $ 1 billion in assets under management, Abra appears to have recovered, thanks to the success of its private client services business which has grown significantly over the past six months, according to Barhydt.

“Usually these are wealthy customers looking for a very high touch experience,” he added.

At the close of its latest funding round, Abra raised $ 55 million with the backing of venture capitalists, including Blockchain Capital and Amex Ventures.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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The 21 best crypto leaders to watch in the second half of 2021

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