Crypto Smackdown!

ryptocurrency promises to redefine the future of finance, yet finance is currently defined for the most part by securities laws that were enacted during the Franklin D. Roosevelt administration.  Collisions between crypto players and regulators are inevitable. 

The noisiest smash-up yet happened today, as cryptocurrency exchange Coinbase Global disclosed that the Securities and Exchange Commission had warned that it would sue the company if it went ahead with a product that would allow users to earn interest by lending crypto assets.  When the product, Lend, was announced in June, it promised to offer an annual percentage yield of 4% for holders of its stablecoin. It has now been delayed until "at least October," according to Coinbase.

“The SEC has been flirting with crypto regulations for some time, but today’s news of Coinbase receiving a Wells notice from the SEC feels very much like the first salvo of a long and drawn-out conflict that may engulf the whole space,”  Webull CEO Anthony Denier told Barron's. 

There were signs that a salvo was coming. Avi Salman noted today on Barrons.com that Gary Gensler,  the SEC's chairman since April, has signaled he wants the agency to take a more active role in overhauling the securities markets, as our cover story this past weekend detailed, and  crypto is high on the agenda.   In a speech before Aspen Security Forum in early August, Gensler said: 

If you want to invest in a digital, scarce, speculative store of value, that’s fine. Good-faith actors have been speculating on the value of gold and silver for thousands of years.

Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.

When it comes to crypto, the SEC chairman has declared himself the new sheriff in town. But what sort of law he is going to lay down is now a guessing game. 

Despite what critics allege, Gensler may not want to impose “regulation by litigation,” Avi wrote. 

It could be that it is simply unclear who has authority over crypto activities, because so many agencies have a piece of it. So writing rules for the industry isn’t going to happen quickly without more obvious authority. The faster that happens, the better it will likely be for crypto. Gensler said he’s working on figuring out the framework, and will need Congress’ help.

Until there are new rules, the SEC  has claimed the authority to regulate digital assets from a 1946 Supreme Court case, SEC  v.  W. J. Howey Co., which involved the application of the Securities Act of 1933. The court found that the test of whether an investment was a security was  "whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others."  Read Avi's report here.