Today, the United States Securities and Exchange Commission (SEC) filed a lawsuit against cryptocurrency exchange Coinbase in federal court in New York. The SEC alleges that Coinbase has earned billions of dollars in revenue over the years, but lacks the registration, disclosure, and protection required. Coinbase has never registered as a broker, national securities exchange, or clearing agency, and has not obtained any applicable exemptions. Coinbase has operated as an unregistered broker since at least 2019, including recruiting potential investors, handling customer funds and assets, and charging transaction-based fees; and as an unregistered exchange, including offering a market that aggregates multiple parties’ crypto assets and matching and executing these orders. The SEC stated that Coinbase has violated regulatory structures for many years and does not meet disclosure requirements built by Congress and the SEC to protect the national securities market and investors.
Author: Michael Nadeau
Translation: Luffy, Foresight News (this article was published before the SEC officially filed a lawsuit against Coinbase)
Whether you are an entrepreneur, developer, or investor, understanding upcoming regulations and policies is a must-have course in the cryptocurrency industry. With the topic of regulation heating up in the United States and MiCA becoming law in Europe, it is time to delve deeper.
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Regulation is a broad topic, and to make it easier to read and understand, we divide the content into two parts. In Part 1, we will discuss:
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the role of the United States Securities and Exchange Commission (SEC)
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The love-hate relationship between Coinbase and the SEC
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Disagreements between the executive and legislative branches
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Cryptocurrency users and the 2024 election
Image source: Times Higher Education
SEC’s Role
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Protect investors;
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Maintain fair, orderly, and efficient markets;
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Facilitate capital formation.
The SEC promotes full public disclosure by companies, protects investors from fraud and manipulation, and oversees corporate takeovers.
The SEC is responsible for maintaining the orderly operation of the world’s largest capital market. They also have the power to create new rules, as long as they comply with the framework established by Congress in 1933/1934. The SEC’s enforcement of this framework is intended to create an environment in which bad actors are held accountable and good actors are provided with innovative opportunities.
Without thoughtful regulation, the cryptocurrency industry cannot mature and realize its true potential. However, the current regulatory framework was created in 1933/1934, and we do not yet have a new set of laws or regulations that apply to new types of crypto assets.
Crypto assets are fundamentally different from traditional securities in many ways, such as:
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No investment contract (secondary trading).
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Crypto assets do not represent legal ownership.
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Crypto assets do not grant holders the right to interest or dividends.
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Many crypto assets have commodity-like characteristics, where assets are used to pay for or consume services.
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Crypto assets are digital bearer instruments that can be self-custodied.
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Crypto assets can be traded peer-to-peer.
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Crypto assets are traded globally and settled almost instantly around the clock.
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Due to the characteristics of public chains, custody, ledger/transfer agents, trading, auditing, and other services can be bundled.
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Smart contracts support new peer-to-peer business models and asset trading and other market automation.
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The transparency and automatic audit/verification function of the public chain have created new tools for regulatory agencies to comply with investor disclosure in new ways.
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As crypto networks mature, they become more decentralized. The lack of centralization makes it difficult to comply with current disclosure requirements for traditional securities.
The SEC wants to place cryptocurrencies and traditional securities in the same regulatory framework, which is not feasible. But we should not give up the goal of protecting investors while improving capital efficiency. We just need to adjust the rules or create new ones. This work will fall on Congress, not the SEC.
Of course, cryptocurrency has not escaped the political complexity.
Enforcement Regulation
Unfortunately, the SEC’s current practice of regulation through enforcement has not
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