The SEC has been continuously taking aim at cryptocurrency exchanges with allegations of securities violations and unexpected Wells notices. Coinbase is among the exchanges that received a Wells notice, and it has proactively mentioned the possibility of leaving the US if the government doesn’t establish clear legal regulations for the crypto sector.
Countries around the world are recognizing crypto and integrating it into specific regulations, yet the US – a technological superpower – is not affording the industry the same privilege. While MiCA regulations in the EU have been voted on and are nearing launch, the Chairman of the US Securities and Exchange Commission (SEC) claims that the Securities Act is the applicable legal framework for crypto in the country.
“The current Securities Act encompasses most activities occurring in the crypto market. To access and sell tokens to US investors, companies will need to comply with the Securities Act or regulations from the Commodity Futures Trading Commission (CFTC),” stated Gary Gensler, Chairman of the SEC.
Coinbase has become a leading advocate for specific crypto legislation in the US.
Since the beginning of the year, the SEC has confronted at least five exchanges with allegations of violating the Securities Act. Most recently, the conflict between the SEC and Coinbase has garnered significant attention from investors within the community, as it represents a clash between the government and a licensed US business.
Read more: SEC targets Coinbase
Since receiving the Wells notice on March 23rd, Coinbase has maintained an uncompromising stance against the SEC. Paul Grewal, Coinbase’s Chief Legal Officer, has frequently argued that the US-based exchange has always acted in good faith and strived to comply with US laws.
Notably, at a fintech conference in London, Coinbase CEO Brian Armstrong mentioned the possibility of the exchange leaving the US. He had previously expressed his disappointment and revealed that Coinbase had not received any arguments or evidence supporting the allegations of violation.
“Coinbase has not received any feedback from the SEC on how we can improve our practices. I think we will have to end up in court to get the clarity we need and set a precedent,” said
Brian Armstrong, CEO of Coinbase.
Throughout April, Coinbase has been continuously working with the SEC, hoping to find common ground on specific regulations for crypto. This issue not only affects Coinbase but also the entire crypto market.
In a document shared by Coinbase’s Chief Legal Officer, it is stated that the nature of the crypto market differs from that of securities. For instance, when considering assets, the coins/tokens held by investors do not make them owners of the companies. These investors also do not receive dividends or any profits from the company whose coins/tokens they hold.
Instead, investors gain access to technological features within the protocol, enabled by smart contracts. While these features are often referred to using terms borrowed from corporate law (e.g., “governance rights”), they are fundamentally different from traditional corporate legal rights in the US
Although it’s just a glimpse, we can see the distinction between the crypto market and securities. Therefore, what Coinbase desires from the SEC is also what many investors and businesses in the US currently need. To increase pressure on the SEC and push for a specific legal framework for crypto, Coinbase has filed a lawsuit to compel the agency to answer questions it posed back in July 2022.
On April 25th, Coinbase filed a motion in court demanding the SEC to respond to 50 questions surrounding crypto regulations. Mr. Grewal stated that, according to the Administrative Procedure Act, the SEC is obligated to answer these questions within a specific timeframe. After nine months with no response, Coinbase decided to sue the SEC.
“We are not asking the court to instruct the SEC on how to respond. We are simply requesting the court to order the SEC to address all those questions,” said Paul Grewal, Coinbase’s Chief Legal Officer.
Coinbase’s action not only presents an opportunity for the company to overcome its legal challenges but also generates goodwill among crypto investors in the US and globally. As news of Coinbase’s lawsuit against the SEC flooded Twitter, it wasn’t hard to find comments supporting the exchange. For instance, investor RyanS Adams suggested that the court might be the venue to hold the SEC accountable
Attorney Jeremy Hogan praised Coinbase’s move, stating that the best defense is a good offense. In the comments under his tweet, many people suggested that Ripple should have taken similar action instead of expending significant resources and effort over the past years. However, some investors commented that the battle between Coinbase and the SEC could drag on for years, similar to Ripple’s case
Many investors are anticipating the SEC’s forceful yet potentially conflicting responses in the coming period, especially given the agency’s chairman is known for his crackdown on crypto. Gary Gensler’s statements have always been a subject of debate within the crypto community, particularly regarding their reasonableness.
If Gensler and the SEC remain uncompromising towards crypto, Coinbase’s exit from the US market is certainly a possibility. Should a leading player like Coinbase make such a move, could it trigger a wave of crypto companies “relocating” from the US? The lawsuit between Coinbase and the SEC may well determine that.
Will Gary Gensler continue to be steadfast?
The image of the SEC Chairman is deteriorating day by day in the eyes of crypto investors after the noise surrounding exchanges and securities accusations during the first 4 months of 2023. For a long time, Mr. Gary Gensler has always played the “villain” role in the crypto market by continuously accusing coins/tokens of being securities, causing many exchanges to feel miserable because of this issue.
On April 14th, during a meeting between the SEC chairman and the agency’s commissioners, Mr. Gensler proposed bringing brokers under additional regulatory oversight into the market to redefine and “modernize” the exchange. However, this idea was met with opposition from Commissioner Hester Peirce. Ms. Peirce expressed concerns about Mr. Gensler’s proposals and argued that there is too much ambiguity regarding the SEC’s current handling of securities.
Not only within the SEC, even politicians feel that Mr. Gensler and the SEC seem to be getting too deep into crypto, most recently the case with Coinbase. Feeling the same inadequacy in the proposal on April 14 as Ms. Peirce, Mr. Davidson Warren – Representative from Ohio said that the SEC Chairman should be fired due to his persistent abuse of the crypto market.
The above developments probably won’t discourage the SEC chairman, but in the April 19 hearing, Mr. Gensler was put in a difficult position when he couldn’t answer the question of Patrick McHenry – Chairman of the Financial Services Committee on whether Ethereum is a commodity or a security?
An asset cannot be both a commodity and a security. In your view, is Ethereum a commodity or a security? Patrick McHenry, Chairman of the Financial Services Committee
In the clip quoted by Cointelegraph, the fact that the SEC Chairman was vague and avoided answering the question directly made investors suspect that Mr. Gensler was also gradually losing his resolve in his own direction. Or Mr. Gensler himself has not yet found a specific answer according to the current Securities Law in the US.
The crypto industry has grown and attracted the attention of the SEC under Chairman Gary Gensler. But under Gensler, the SEC has not been popular with people inside and outside the market, and has been constantly criticized from many sides. In the Podcast about Coinbase considering moving out of the US, Canadian billionaire investor Chamath Palihapitiya had some bad words aimed at the SEC Chairman.
Crypto is considered dead in the US. In the US, Gensler even blamed crypto for the banking crisis. Therefore, the US government is determined to aim its gun at crypto
Chamath Palihapitiya, Investor and Billionaire
Beyond the US borders, there are many countries in the world such as Hong Kong or Singapore that always open their doors to the crypto industry. Or right in the EU, when the MiCA regulations are launched, companies will have a firm grasp of the law to freely develop without having to worry about Well notification like in the US.
Europe is trying to find a way to bring crypto into the financial system, while the US policy is to prevent cryptocurrencies from coming from outside, Jay Clayton, former SEC Chairman, shared.
This is like a wake-up call for both the SEC and Mr. Gensler about the US’s lag in the world in crypto legal regulations. This is not an overnight problem, but the SEC needs to take different steps in the near future to avoid any more crypto giants considering the decision to leave the US like Coinbase.
