Even the staunchest crypto supporter can see why the SEC is targeting the crypto industry for some Mandatory. The events of the past year—from the failure of Three Arrows Capital to the fraud at FTX—were bound to bring some scrutiny, and the industry has always been very hospitable to scandalous hucksters.
But the recent wave of enforcement actions by the US Securities and Exchange Commission and US agencies do not meet the standards of protection. Instead, a careful review of everything from the banking crackdown earlier this year to endless regulation through enforcement strikes a different chord. It appears that the US government is taking action to protect the financial services industry from disruption.
Exhibit A of this phenomenon is the SEC’s giant lawsuit against Coinbase – a company long seen as one of the “good guys” in cryptocurrency. Its clients include large asset managers, Fortune 100 companies and the US government itself, and none of them have ever complained about the integrity of its services. Unlike FTX, Coinbase has never defrauded its customers. It has not located itself in an offshore tax haven and has never been hacked. In fact, the company has repeatedly stated its intent to submit to regulation and has gone so far as to file a lawsuit against the Securities and Exchange Commission to force it to provide a roadmap on how to do so.
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Her reward? A 100-page stack full of inconsistencies, such as some Tier 1 tokens being securities and some not. Imagine a city that refuses to tell you speed limits but gives you speeding tickets more often than not. Nobody would take such a place seriously. We still don’t know if ether (ETH) is a security, even though SEC head Gary Gensler has told us time and time again that his agency has all the authority it needs to make this call.
New technologies often run counter to old rules, and regulators may initially struggle to understand startups because they don’t understand the technology. Gensler doesn’t have that excuse. He was a visiting instructor at the MIT Digital Currency Initiative and taught a generally respected class on blockchain. How, then, did he go from this level of knowledge and belief to arguing on CNBC that we don’t need encryption?
(embed) https://www.youtube.com/watch?v=VKxXdUvMqAc (/embed)
Gensler protects Somebody, but it certainly isn’t American investors who won’t be left with any service providers in the end. Nor are crypto companies the ones to move to friendlier jurisdictions. It is Wall Street companies that threaten cryptocurrencies. It is difficult to review the increasingly erratic regulatory approach and draw any other conclusion. For wit:
- America is one of the few major countries that does not have a Bitcoin Exchange Traded Fund (EFT). Several companies have tried to issue one, but the SEC has refused to approve any of them, arguing that the cryptocurrency markets are unregulated. This is an odd defense because the agency has already approved futures-backed ETFs that buy derivatives tied to those markets, products that are guaranteed to underperform because of the added friction. But they do maintain the presence of established companies like the Chicago Mercantile Exchange and its associated brokers.
- The Securities and Exchange Commission has designated stablecoins as securities, a ruling that kills their usefulness as payment products. Stablecoins shouldn’t be controversial. They use a familiar model, expand the dollar’s reach, and create additional demand for Treasurys. The only entities they are harming are the legacy banks and centralized payment providers that dominate the industry.
- The agency argued that public companies holding cryptocurrencies for others should treat them as balance sheet liabilities and set aside additional reserves. This approach — which is not applicable to other assets — makes offering cryptocurrency too expensive for all but the largest custodians.
- Crypto offers new ways for startups and decentralized projects to raise money from potential clients and users, reduce funding costs and expand financial inclusion. But the SEC has repeatedly insisted on expensive registry systems that force crypto back into an investment bank-led fundraising system.
- Trying to cram digital assets into existing regulatory frameworks designed for stocks and bonds limits their usefulness but is a boon to Wall Street incumbents who already had the requisite licenses — licenses that would have been practically impossible for start-ups to obtain. The only exception? The highly questionable Promethium Capital, whose acquisition of a futile license proves the point.
- Recent rulings on what kind of service providers can be considered “qualified custodians” seem designed to deny government financial authorities their ability to hire smaller players who tend to be crypto-natives.
- After filing a civil lawsuit against Binance, the world’s largest cryptocurrency exchange, the SEC tried the extra step of requiring the government to freeze all assets in its local entity, effectively putting it out of business.
- The Coinbase lawsuit argues that offering software to people who want to store their crypto assets should be limited to registered brokers. If this rule were suspended, it would effectively kill the killer cryptocurrency app for self-booking, forcing all investors back into the arms of brokers.
Enacting tough rules can create strong moats for incumbents—the dirty secret of every highly regulated industry. Large companies may publicly complain about the cost of compliance but privately value the competitive advantage of being on the other side of the regulatory divide. It’s one of the reasons why highly regulated industries like finance or healthcare rarely see turnover at the top.
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Protecting the status quo is also the only reasonable explanation for why the SEC opposes Congress to winding things down through legislation. Gensler says over and over that the 1930s securities laws and the Howey test — a Supreme Court decision made before the invention of the transistor — provide all the clarity his agency needs to regulate crypto. The rest of the world isn’t embracing this approach, perhaps because legacy service providers aren’t as prominent as America’s.
It is worth noting that some regulators within the United States disagree with this approach, including other commissioners at the SEC.
Five years ago, in a speech at an MIT blockchain event, Gensler He said Blockchain technology has the real potential to change the world of finance. “This can lead to lower costs, risks and economic rents in the financial system,” he added.
The technology hadn’t changed at the time, but Gensler had. It is fair to ask whose interests he is protecting.
Omid Malakan Assistant professor at Columbia Business School and author Rebuilding trust: the curse of history and the crypto cure for money, markets, and platforms.
This article is for general information purposes and is not intended and should not be considered legal or investment advice. The views, ideas and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
