The U.S. Securities and Exchange Commission (SEC) is hardly known for its crypto-friendly approach. So, when Coinbase (NASDAQ:COIN) CEO Brian Armstrong revealed that the securities watchdog tried to turn his company into a Bitcoin-only exchange before the lawsuit, the crypto industry was not surprised.
Armstrong opened up about the prologue of the recent SEC lawsuit against Coinbase in an interview with The Financial Times. Filed in June 2023, the lawsuit alleges that 13 of the crypto assets trading on Coinbase, including Cardano (ADA-USD), Polygon (MATIC-USD), Solana (SOL-USD), and Sandbox (SAND-USD), are securities, and the crypto exchange is providing brokerage and clearing services for these unregistered securities.
The crypto exchange CEO unveiled that the SEC previously asked Coinbase to stop trading on all crypto assets except for Bitcoin (BTC-USD). It meant delisting over 200 coins and tokens just because the SEC believed “every asset other than Bitcoin is a security.”
An Elusive Matter: What Makes an Asset a Security?
The SEC’s effort to put cryptocurrencies under its authority is nothing new. From the Ripple (XRP-USD) case to the Binance (BNB-USD) lawsuit, the Commission is pushing to register crypto assets as securities. However, defining all non-Bitcoin cryptocurrencies as securities would be a bold move, even for the SEC. That’s because, despite being so often used across the crypto industry, the term “security” carries a surprisingly vague meaning that’s hard to generalize.
As the SEC v. Coinbase lawsuit brought up the conversation, cryptocurrencies lack a clear regulatory framework because it’s still up in the air whether they should be treated as securities or not. That can easily be tied to a decades-old method that determines which assets are deemed a security.
The U.S. regulators use the Howey Test, a 77-year-old method that classifies an arrangement between two parties as a security or an investment contract if there is an investment of money in a common enterprise “with a reasonable expectation of profits to be derived from the efforts of others.”
The unprecedented financial characteristics of crypto assets combined with the vague elements left in the definition of securities -such as “reasonable expectation”- make it understandably hard to determine whether a cryptocurrency is a security or not using the Howey Test. To top it all off, the definition of what constitutes a security differs from one jurisdiction to another based on a myriad of factors, including economic context, historical experiences (i.e., previous legal cases), and policy objectives.
The Real Cost of Unclear Regulations
The United States seemingly needs more time and discussion to find an exact spot to place crypto assets. However, time turned into a rather scarce source for the crypto industry, which is already worn down by a year-long bear market. On the other hand, taking the easy route regulation-wise and pushing to identify all crypto assets as securities is not helping the U.S. crypto industry either.
Joonatan Lintala, the CEO and co-founder of Web3 social app Phaver, highlighted that the lack of clarity and unfounded legal attacks in the U.S. have already caused a massive shift in Web3 projects’ focus and activity. He explained that Phaver is just one of many global projects to shift focus “completely away from the U.S. in terms of funding and users in favor of Asian markets, including Japan and Hong Kong.”
According to Lintala, the Asia region is becoming more prominent in Web3 and has a leadership that “embraces the opportunities instead of inventing threats in Web3.”
Crypto Needs Fast-but-Fair Regulatory Clarity
The SEC’s efforts to establish crypto assets as securities have triggered an exodus from the U.S. to more crypto-friendly regions. If such rules come into effect, owning and exchanging cryptocurrencies will be bound to the same regulatory framework as holding and exchanging equities, bonds, and stock options, hindering any innovation or growth of the still-nascent industry.
The SEC needs to be able to clearly explain how it came up with the decision, so everyone would know how to react and move forward, according to AAG CEO Jack Vinijtrongjit. “You would think that after so many years, they would have made their mind up already,” he said, stressing that leaving the legal identity of crypto assets ambiguous would cause crypto-related businesses to continue to move outside the U.S.
The SEC should make it very clear how to determine whether a cryptocurrency is a security while outlining a clear procedure around it, Vinijtrongjit elaborated. “This should not come down to Congress acting and potentially removing Gary Gensler from his post,” he added.
Reminding that it’s also possible to change a policy once an initial plan is established, the AAG CEO recommended putting the basic rule in place, then measuring the outcome and adjusting accordingly.
Reject Attempts are Misguided
Reminding that there were times when regulators tried to ban Bitcoin, MetaTime CEO and co-founder Yusuf Sevim noted that interest in established altcoins or digital currencies cannot be stemmed. “The financial sector, not just individuals, rejects such bans,” Sevim added.
He noted the vast potential of digital currencies and blockchain, calling all stakeholders to “Abandon duplicitous attitudes, stop trying to claim more of the pie and encourage the change via prompt, suitable regulations.”
In order to appreciate the value of digital assets, honor user choices, and navigate the new financial era, the crypto industry needs a comprehensive approach that protects everyone's interests, according to Sevim.
Stressing that attempts to reject or stall, especially before a bull market, are misguided, Sevim explained that the digital asset industry is rapidly evolving, and rigid policies that resist adaptation won't survive.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.