Before filing a lawsuit against the exchange, the US Securities and Exchange Commission (SEC) requested that Coinbase cease trading in all cryptocurrencies other than Bitcoin as a statement of the agency’s intention to establish regulatory control over a wider market segment.
After taking legal action against the Nasdaq-listed company last month for failing to register as a broker, Coinbase CEO Brian Armstrong confirmed that the SEC made this proposal.
The SEC claimed that 13 of the platform’s most infrequently traded cryptocurrencies on Coinbase were securities and that by making them available to users, the exchange came within the regulator’s authority.
However, the preceding demand that Coinbase delist each and every one of the more than 200 tokens it provides, save for the flagship token Bitcoin, shows that the SEC, led by head Gary Gensler, has pushed for greater control over the cryptocurrency business.
Armstrong remarked, “They came back to us, and they said… we feel every asset other than Bitcoin is a security. We then asked, ‘Well, how are you drawing that conclusion, since that’s not how we interpret the legislation?’ They advised that any assets other than Bitcoin be removed from the list because they would not be explaining it to them.”
Unless they registered with the commission, most American cryptocurrency businesses would have been operating illegally if Coinbase had consented, setting a precedent that may have led to that outcome.
“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,” he asserted.
The SEC and the Commodity Futures Trading Commission (CFTC) have been vying for control of the cryptocurrency industry’s oversight, which has historically been a murky area.
Three months before the SEC filed its own lawsuit against Binance, the largest cryptocurrency exchange, the CFTC filed one of its own in March of this year.
Except for Bitcoin, Gensler has already stated that he thinks most cryptocurrencies are securities. However, the SEC has adopted this approach in its efforts to regulate the industry, as seen by the advice to Coinbase.
The regulator’s case against the exchange did not include Ether, the second-largest cryptocurrency and a key component of numerous industry projects. It was not among the 12 “crypto asset securities” listed in the SEC’s complaint against Binance.
According to the SEC, its enforcement division didn’t formally ask “companies to delist crypto assets.”
“The staff may share its own views as to what conduct may raise questions for the commission under the securities laws during an investigation,” it continued.
The SEC oversees stocks, bonds, and other conventional financial instruments, but US policymakers are still divided on whether all crypto tokens or just some of them should fall under its jurisdiction.
SEC oversight would result in much stricter compliance requirements. As well as lending and borrowing money from consumers, cryptocurrency exchanges frequently offer custody services—a combination of services that is not permitted for SEC-regulated businesses.
According to Charley Cooper, a former CFTC chief of staff, “a lot of American companies have built their business models on the premise that these crypto tokens aren’t securities.” Many of them will have to discontinue procedures right once if they are advised otherwise.
“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, a partner at the law firm Scoolidge, Peters, Russotti & Fox.
The SEC declined to comment on how a settlement involving Coinbase delisting all tokens other than Bitcoin may affect the rest of the industry.
Since its creation, the CFTC has maintained that cryptocurrencies like Bitcoin and Ether can be regulated as commodities under the CEA.
The CTFC’s main argument is that a cryptocurrency like Bitcoin is a commodity because each Bitcoin has the same worth as another Bitcoin of the same grade and can be exchanged for another Bitcoin on exchanges. The CFTC’s action against the stablecoin issuer Tether and the cryptocurrency exchange Bitfinex confirmed this opinion. In a filing from October 2021, the group asserted that “digital assets such as Bitcoin, Ether, Litecoin, and Tether” are all commodities.
In April 2023, Rep. Patrick McHenry projected that in two months, the United States would have a cryptocurrency bill covering both securities and commodities issues and including both Bitcoin and Ether. He recently put out a measure that demands a clearer separation of duties between the SEC and the CFTC with regard to cryptocurrency-related matters.
It would allow the trading of Bitcoin securities on alternative trading platforms and specifically permit registration, both of which would fall under the SEC’s purview.
The SEC’s Gary Gensler has previously asserted that he thinks his agency can regulate cryptocurrencies and that “most crypto tokens are securities,” but he avoided answering the question of whether Ether was a security during a contentious hearing in April 2023.
But in 2018, he said: “Bitcoin. Ether. Litecoin. Cash-based Bitcoin. Why did I choose those four names? They are not securities”.