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08/10/2022

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The SEC’s Fight With Coinbase Has Massive Ramifications For The Market

The SEC’s Fight With Coinbase Has Massive Ramifications For The MarketATZCrypto - Latest Bitcoin, Ethereum, Crypto News & Price Analysis At the heart of the legal dispute between the SEC and Coinbase is regulatory jurisdiction related to the rapidly...

The SEC’s Fight With Coinbase Has Massive Ramifications For The Market

The Securities and Exchange Commission (SEC) is at odds with Coinbase on the issue of whether the exchange allowed United States clientele to exchange unregistered securities. The exchange refused the claim, insisting they do not list securities.

Despite this back and forth, the test would have wider consequences. It becomes worse if the SEC decides to define some crypto assets as securities. Standing among the biggest exchanges in the market, Coinbase allows clients to exchange over 150 different tokens on the platform. If any of these tokens are securities, then the commission cites its transactions, as per SEC directives.

According to Gary Gensler, Coinbase should be registered as a national securities exchange. This is not the first time Coinbase has had a case with the SEC. There were also allegations of insider trading against Ishan Wahi that involved cryptographic forms of money. Per the SEC, nine of 12 computerized tokens involved in Ishan’s case were actually securities. This includes seven, which are listed on the exchange.

However, Coinbase continues to deny its involvement, assuring it does not list securities.  According to Coinbase officials, the company has a “rigorous process for analyzing and reviewing every digital asset before listing it on the exchange. “The official added that the SEC had already reviewed and approved the process.

Analysts argue that Coinbase has little to lose in confronting the SEC, but the fight has massive ramifications for the market. In charging Ishan with insider trading, the SEC fired what looks like the opening blaze in a bigger legal battle with Coinbase. The critical concern remained, what are securities?

What Are Securities?

There are concerns about what makes a security in the crypto space. Other concerns asking which regulator has ward between the SEC and CFTC. These questions remain a hot topic among crypto players. Industry members are calling for more clarity in this area.

According to the Howey Test, digital assets will be seen as securities if the tokens can help investors to subsidize a company with the goal of benefiting from the personnel working at the institution.  The Howey Test is a long-standing judicial standard used by the SEC and now applies to cryptocurrencies. It determines whether people are investing money in something with expectations of profiting from the efforts of other players.

Other than BTC, which U.S. Regulators consider a stock; the SEC has not revealed which coins are securities. Per their communication, it hinges on individual exchange’s willingness to choose whether to list them for trade. Even so, exchanges are now hesitant to list their contributions as securities since financial backer security rules are chaotic and conflicting with digital assets.

The fight had begun even before the insider trading case started. According to a report on protocol.com, the SEC was already investigating the crypto powerhouse for alleged violation of securities laws. The regulator was setting the stage for a confrontation that could not only determine Coinbase’s future but that of the entire cryptocurrency industry.

Coinbase Fights Back

Coinbase exchange was quick to defend itself, signaling plans to fight back. When the SEC declared its charges, majorly leaning on the notion that the tokens involved were securities, Paul Grewal blatantly said, “Coinbase does not list securities. End of story.” The Coinbase Chief legal Officer also accused the SEC of having “little interest in this most fundamental role of regulators.”

Coinbase officials have a reputation for their strong heads, with fiery public commentaries against the SEC. However, Grewal and Faryar Shirzad also explained key arguments for Coinbase’s legal counterattack. The latter is Coinbase’s Chief Policy Officer and together with Grewal, makes for strong generals in the battle with the Securities and Exchanges Commission.

It remains unclear whether the issues the SEC would explore in investigating a company’s financial reporting before an initial public offering (IPO) have much to do with the question of whether digital assets are securities.  Regardless of whether the same agency happens to have supervision in both cases.

Protocol.com reports John Reed Stark, the former chief of the SEC’s Office of Internet Enforcement, commenting on Grewal’s statement. Per the report, Reed Stark believes Grewal’s statement was misleading, telling Protocol, “What they are saying implies some sort of approval.”

More Opinions From Coinbase Officials

Another opinion comes from Marc Fagel, the SEC’s former San Francisco regional director, who agreed with Reed Stark that Coinbase’s statement is “obviously a little self-serving.” In his opinion whether the SEC did or did not review Coinbase’s listing process is insignificant. According to him, it does not in any way influence whether a particular coin offering required registration under the federal securities laws.

Speaking in his SEC chair role, Gary Gensler explained his opinion. He agrees with the idea that most cryptocurrencies are indeed securities. However, this opinion predates his arrival.  Under the leadership of Jay Clayton, the SEC sued Ripple on grounds that XRP was an unregistered security.

According to Alma Angotti, what the Securities and Exchange Commission will say is, “These are the rules. They have always been the rules. It is technology agnostic, and we will use the Howey Test to decide whether something is a security or not.” Alma is a partner at Guidehouse and former senior counsel at the SEC.

When the SEC published the insider trading complaint, Coinbase’s Chief Policy officer, Shirzad, spoke. He said that the company had filed an appeal urging the SEC to begin making rules on digital asset securities.

Part of the official request reads, “Coinbase is asking the SEC to start a process where the public and key stakeholders can openly provide input into the SEC’s work on crypto.”

The Ramifications Could Affect The Market

At the center of the legal conflict between the SEC and Coinbase is regulatory jurisdiction associated with the fast-paced crypto marketplace. The discussion hinges, more specifically, on the definition of whether cryptocurrencies and related stablecoins can legally be considered securities. If so, they would be subject to regulation by the SEC.

It is unheard that one company requests that the agency start a law-making process. The move is characteristic of Trade Associations or Congress itself.

According to Reed Stark, it is okay to ask the SEC to design rules. Stark says “The reality is in the area of crypto, causing over 100 cases and coming out with every possible form of guidance.”

The SEC has issued several laws that forced Coinbase to alter its business. For instance, early this year the SEC announced that companies holding crypto on behalf of customers must record those assets as a liability on their balance sheets alongside disclosing potential risks to investors. The move forced Coinbase to disclose in a regulatory filing that customers could lose their cryptocurrency assets in case the company went bankrupt.

Omid Malekan says that there has been a debate within the crypto ecosystem. The debate challenges ‘Whether Coinbase’s mistake was trying to play with the rules.’ The discussion arises, as at every turn, Coinbase seems to be the target of different SEC probes, adding to the list of companies facing government crackdowns. Malekan is a blockchain and cryptocurrencies teacher at Columbia Business School

The instructor notes more blowback in the crypto industry, with no praise from regulatory frameworks such as the SEC. “You don’t see regulatory agencies like the SEC recognizing them for at least trying, going to them, of talking to them.”

Conclusion

Nonetheless, cryptocurrency and blockchain offer an opportunity to improve finance. It also provides solutions to some of the worst elements of its current structure. The slowness of the U.S financial structures where crypto is concerned is an issue. The same goes for its expensiveness, and most unfortunate exclusiveness have been a hindrance to innovation.

The crypto market and industry must be seen as transformational, and open to flexibility with current and emerging models. Such innovations will modernize the market’s shortcomings.

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