The US Securities and Exchange Commission (SEC) asked Coinbase to halt trading in all cryptocurrencies other than bitcoin prior to suing the exchange, in a sign of the agency’s intent to assert regulatory authority over a broader slice of the market.
Coinbase chief executive Brian Armstrong said that the SEC made the recommendation before launching legal action against the Nasdaq-listed company last month for failing to register as a broker.
The SEC’s case identified 13 mostly lightly traded cryptocurrencies on Coinbase’s platform as securities, asserting that by offering them to customers the exchange fell under the regulator’s remit.
But the prior request for Coinbase to delist every one of the more than 200 tokens it offers – with the exception of flagship token bitcoin – indicates that the SEC, under chair Gary Gensler, has pushed for wider authority over the crypto industry.
“They came back to us, and they said... we believe every asset other than bitcoin is a security,” Armstrong said. “And, we said, well how are you coming to that conclusion, because that’s not our interpretation of the law. And they said, we’re not going to explain it to you, you need to delist every asset other than bitcoin.”
If Coinbase had agreed, that could have set a precedent that would have left the vast majority of the American crypto businesses operating outside the law unless they registered with the commission.
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“We really didn’t have a choice at that point, delisting every asset other than bitcoin, which by the way is not what the law says, would have essentially meant the end of the crypto industry in the US,” he said. “It kind of made it an easy choice… let’s go to court and find out what the court says.”
Oversight of the crypto industry has hitherto been a grey area, with the SEC and the Commodity Futures Trading Commission (CFTC) jockeying for control.
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The CFTC sued the largest crypto exchange, Binance, in March of this year, three months before the SEC launched its own legal action against the company.
Mr Gensler has previously said he believes most cryptocurrencies with the exception of bitcoin are securities. However, the recommendation to Coinbase signals that the SEC has adopted this interpretation in its attempts to regulate the industry.
Ether, the second-largest cryptocurrency, which is fundamental to many industry projects, was absent from the regulator’s case against the exchange. It also did not feature in the list of 12 “crypto asset securities” specified in the SEC’s lawsuit against Binance.
The SEC said its enforcement division did not make formal requests for “companies to delist crypto assets”.
“In the course of an investigation, the staff may share its own view as to what conduct may raise questions for the commission under the securities laws,” it added.
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Stocks, bonds and other traditional financial instruments fall under the SEC’s remit, but US authorities remain locked in debate as to whether all – or any – crypto tokens should fall under its purview.
Oversight by the SEC would bring far more stringent compliance standards. Crypto exchanges typically also provide custody services, and borrow and lend to customers, a mix of practices that is not possible for SEC-regulated companies.
“There are a bunch of American companies who have built business models on the assumption that these crypto tokens aren’t securities,” said Charley Cooper, former CFTC chief of staff. “If they’re told otherwise, many of them will have to stop operations immediately.”
“It’s very difficult to see how there could be any public offerings or retail trading of tokens without some sort of intervention from Congress,” said Peter Fox, partner at law firm Scoolidge, Peters, Russotti & Fox.
The SEC declined to comment on the implications for the rest of the industry of a settlement involving Coinbase delisting every token other than bitcoin. – Copyright The Financial Times Limited 2023
