According to Armstrong, determining regulations for the crypto industry is not as complex as it may seem. Whether through Congress or case law, achieving regulatory clarity is crucial for the U.S. crypto industry’s growth and development.
His statement came as Coinbase was facing a lawsuit from the U.S. Securities and Exchange Commission (SEC). The financial watchdog claimed the company violated some securities laws.
The lawsuit is part of the SEC’s crackdown on the crypto industry in the country. Since Gary Gensler became the chairperson of the SEC two years ago, his stance against crypto firms has remained the same.
“We don’t need more digital currency … we already have digital currency — it’s called the U.S. dollar,” said Gensler.
According to Gensler, the majority of cryptocurrencies are securities, which fall under his regulatory body’s power. However, crypto firms argue that, by design, they operate independently from the traditional financial system.
Coinbase is the latest crypto company that the SEC has taken action against. Other companies include Binance, Kraken, Genesis and Gemini.
1/ Some really sketchy behavior coming out of the SEC recently.
— Brian Armstrong 🛡️ (@brian_armstrong) September 8, 2021
SEC filed a lawsuit against Coinbase
The SEC filed the lawsuit a few days before the interview — on Thursday, June 6 — one day after the commission sued Binance. One of its accusations is engaging in securities exchange, broker-dealership and clearing house operations without registering with the commission.
The SEC claimed that 13 of the listed assets on Coinbase are securities. Coinbase rejected these assertions because the tokens are commodities — not securities.
“The assets that we do trade, those are commodities, so they don’t require those registrations […] we are trading on our exchange crypto commodities,” said Armstrong.
According to him, Coinbase conducts thorough reviews of tokens before listing them. The process involves rigorous analysis, with extensive documentation for each listed asset.
Coinbase has a committee responsible for reviewing these tokens, which doesn’t include Armstrong. The committee evaluates various factors, including a legal analysis of whether these tokens are commodities or securities, before approving them for listing.
Armstrong also said that Coinbase is not a broker-dealer. However, he claimed his company had difficulties in activating a license because “[the SEC] won’t allow us to activate it.”
Coinbase also frequently sought guidance from the SEC but has never received any feedback. As a result, Coinbase had to develop its own process for evaluating tokens.
So which is it?
-Coinbase is an unregistered securities dealer.
-Coinbase is a publicly-listed company that was already trading assets you claim are securities before you allowed it to IPO.
Choose one old man.
The absolute SEC mental gymnastics are getting out of hands.
— Tree of Alpha (@Tree_of_Alpha) June 6, 2023
Coinbase argues with IPO’s approval
In its defense, Coinbase said the SEC had approved its initial public offering (IPO) in 2021. Therefore, the company assumed the SEC had comprehensive knowledge of its business. John Reed Stark, SEC’s former chief of the office of Internet enforcement, argued that this statement is flawed due to misinterpretation.
As a former regulatory chief, Stark highlights that the SEC’s main responsibility is not to endorse or fully understand a company’s operations but to ensure the accuracy of its disclosures. This oversight is essential for enabling informed investment decisions by investors.
He noted that the SEC includes a clear disclaimer in each prospectus, explicitly distancing itself from the claims the exchange intends to use for defense. It does not approve nor verify the securities or the accuracy of the prospectus.
The disclaimer usually goes along the line of, “The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if the prospectus or this prospectus supplement is truthful or complete. Any representation to the contrary is a criminal offense.”
“The goal of SEC review is to ensure that investors and potential investors have all the facts before buying a security, not to confirm that any business is legitimate,” said Reed on Twitter.
“The SEC staff reviews registration statements to see if the SEC’s disclosure rules are satisfied — and that’s it.”
The SEC does not assess the quality or suitability of securities offerings for specific investors or make judgments about their value.
The future of U.S. crypto industry
The future of the crypto sector might lie with the outcome of Coinbase’s lawsuits, as it can open doors to regulatory clarity. Armstrong also maintains it can help the sector catch up with the rest of the world.
Coinbase is dealing with two lawsuits. The first lawsuit accuses the SEC of failing to offer clear regulations despite repeated requests. The second one is related to the accusation that Coinbase facilitated the trading of unregistered crypto securities, including Cardano (ADA), Solana (SOL), Filecoin (FIL) and Polygon (MATIC).
“The whole point of this case from our point of view is to go get regulatory clarity,” said Armstrong in an interview with CNN on Wednesday. “Regardless of the case’s outcome, it’s a step towards clarity.”
At the same time, regulatory clarity can encourage crypto businesses to return to the country instead of staying offshore. Cointelegraph reported on April 11 that the share of global crypto developers in the country had dropped by 26 percent in four years from 2018 to 2022. One of the driving factors was “little regulatory clarity.”
Clear regulation and transparency in the industry can also drive more people to invest in crypto in the future. According to recent research, approximately 12 percent of U.S. citizens invest in crypto.
Clear “boundaries” between two primary U.S. financial regulators, the SEC and the Commodity Futures Trading Commission (CFTC), are also necessary. According to Armstrong’s Twitter post, the SEC and CFTC have made conflicting statements on security and a commodity since there is no clear rule book.
Other governments, such as the U.K., only have a single financial regulator. This way, there is no conflict or “turf war” between the regulating bodies.
“Europe has passed comprehensive legislation. The UK is moving there. Singapore is moving there, Hong Kong. Basically, the US is falling behind. And I think Congress recognizes this,” said Armstrong.
Armstrong proposed basic regulations from traditional finance that could be seamlessly applied to the crypto industry. Some rules include consumer protection, financial statement audits and Anti-Money Laundering and Know Your Customer procedures.