The Securities and Exchange Commission seeks wider authority over the crypto market with a recommendation to Coinbase

Key Points
  • The US SEC asked Coinbase to suspend trading in all cryptocurrencies except bitcoin before suing the exchange for not registering as a broker.
  • Coinbase CEO Brian Armstrong revealed the SEC’s recommendation to delist over 200 tokens, designating them as securities.
  • The move signifies the SEC’s push for greater regulatory control over the broader cryptocurrency market.
  • The decision by Coinbase to contest the request and face legal action is seen as vital to the survival of the US crypto industry.
  • Oversight of the crypto industry has been unclear, with the SEC and CFTC vying for control, leading to debates on whether all tokens should be under the SEC’s jurisdiction.

The US Securities and Exchange Commission (SEC) has taken a significant step towards asserting regulatory authority over a broader segment of the cryptocurrency market by urging Coinbase, a prominent crypto exchange, to halt trading in all cryptocurrencies other than bitcoin. The SEC’s recommendation came before it initiated legal action against Coinbase for its failure to register as a broker.

In a recent interview with the Financial Times, Coinbase’s chief executive, Brian Armstrong, disclosed that the SEC’s case against the Nasdaq-listed company identified 13 cryptocurrencies, primarily lesser-traded ones, as securities. This classification brought them under the regulatory oversight of the SEC. However, the SEC had initially requested Coinbase to delist every one of the more than 200 tokens available on its platform, with the exception of bitcoin, signaling a wider desire for regulatory control over the crypto industry.

“They came back to us, and they said… we believe every asset other than bitcoin is a security,” Armstrong explained. “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.”

Had Coinbase complied with the SEC’s request, it could have set a precedent leaving a majority of American crypto businesses operating outside the law unless they registered with the commission. Armstrong stressed that this approach would have essentially meant the end of the crypto industry in the US.

“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,” Armstrong 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 long been a gray area, with both the SEC and the Commodity Futures Trading Commission (CFTC) jockeying for control. Earlier this year, the CFTC sued Binance, the largest crypto exchange, three months before the SEC’s legal action against the same company.

SEC Chair Gary Gensler has previously expressed his belief that most cryptocurrencies, with the exception of bitcoin, should be considered securities. The recent recommendation to Coinbase indicates that the SEC is adopting this stance in its efforts to regulate the industry.

Notably, the SEC’s case against Coinbase did not include ether, the second-largest cryptocurrency. Ether was also absent from the list of “crypto asset securities” specified in the SEC’s lawsuit against Binance.

The debate over whether all crypto tokens should fall under the SEC’s purview continues among US authorities. If the SEC gains oversight, it would impose more stringent compliance standards on crypto exchanges, which often offer custody services and lend to customers, practices not currently 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,” noted Charley Cooper, former CFTC Chief of Staff. “If they’re told otherwise, many of them will have to stop operations immediately.”

Peter Fox, a partner at the law firm Scoolidge, Peters, Russotti & Fox, added, “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.”

The SEC declined to comment on the potential implications for the rest of the industry if Coinbase were to delist every token other than bitcoin as part of a settlement. The situation continues to fuel discussions on the future regulatory landscape for cryptocurrencies in the United States.

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