The US Securities and Exchange Commission has asked Coinbase to halt trading in all cryptocurrencies except bitcoin before suing the exchange, as a sign of its intention to exercise regulatory control over a wider part of the market.
Coinbase chief executive Brian Armstrong told the Financial Times that the Securities and Exchange Commission made the recommendation before taking legal action against the Nasdaq-listed company last month for failing to register as a broker.
The SEC deemed 13 cryptocurrencies traded on Coinbase’s platform to be “securities”, arguing that by offering them to customers the exchange crossed into the regulator’s jurisdiction.
However, the earlier request for Coinbase to delete each of the more than 200 tokens it offers – with the exception of bitcoin – suggests that the SEC, under Chairman Gary Gensler, is pushing to have broader authority over the crypto industry.
“They came back to us and said. We believe that every asset other than bitcoin is a ‘security’,” Armstrong said. “And, we said, how do you come 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 have to write off every asset except bitcoin.”
If Coinbase had agreed, this could have set a precedent that would have left the vast majority of US businesses in the crypto space operating outside the law unless they registered with the SEC.
“We didn’t really have a choice at that point, delisting every asset except bitcoin, which by the way is not what the law says, would have essentially meant the end of the cryptocurrency industry in the US,” he said. “It made it an easy choice… let’s go to court and find out what the law says.”
Oversight of the cryptocurrency industry has so far been a grey area, with the SEC and the Commodity Futures Trading Commission (CFTC) claiming control. The CFTC sued the largest crypto exchange, Binance, in March this year, three months before the SEC launched its own legal action against the company.
Gensler has previously stated that 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 efforts to regulate the industry.
Ethereum the second largest cryptocurrency, which is fundamental to many projects in the space, was absent from the regulator’s case against the exchange. It was also not included in the list of 12 “crypto asset securities” identified in the SEC’s lawsuit against Binance.
Stocks, bonds and other traditional financial instruments fall under the SEC’s jurisdiction, but U.S. authorities remain locked in debate over whether all – or any – of the tokens should fall under its purview.
Oversight by the SEC will bring about much stricter compliance standards. Crypto exchanges typically also provide custody services and lend and borrow to customers, a combination of practices not possible for companies regulated by the SEC.
“There are many U.S. companies that have created business models under the assumption that these crypto tokens are not securities,” said Charley Cooper, former head of the CFTC. “If you tell them otherwise, many of them would have to immediately cease operations.”
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