Even the most stalwart crypto supporters could see why the Securities and Exchange Commission might target the crypto industry for some enforcement. Events of the past year — from the failure of Three Arrows Capital to the fraud at FTX — were bound to bring some scrutiny, and the industry has always been too hospitable to blatant hucksters.
But the recent spate of enforcement actions by the SEC and U.S. agencies do not meet the standard of protection. Instead, a close review of everything from the banking crackdown earlier this year to the endless regulation by enforcement strikes a different chord. It seems as if the U.S. government is taking action to protect the financial services industry from disruption.
Exhibit A of this phenomenon is the SEC’s mammoth suit against Coinbase — a company long perceived to be one of the “good guys” in crypto. Its client list includes large asset managers, Fortune 100 companies and the U.S. government itself, none of which have ever complained about the integrity of its services. Unlike FTX, Coinbase has never defrauded its customers. It didn’t base itself in an offshore tax haven and has never been hacked. In fact, the company has repeatedly stated its intent to be regulated and has gone as far as suing the SEC to force it to provide a roadmap on how.
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Its reward? A 100-page suit full of contradictions, like some layer-1 tokens being securities and others not. Imagine a town that refuses to tell you what the speed limit is but frequently gives speeding tickets. Nobody would take such a place seriously. We still don’t know whether Ether (ETH) is a security, despite SEC Chair Gary Gensler telling us repeatedly that his agency has all the authority it needs to make that call.
New technologies often clash with old rules, and regulatory agencies can initially struggle to understand startups because they don’t understand the tech. Gensler doesn’t have that excuse. He was a visiting instructor at MIT’s Digital Currency Initiative and taught a generally respected class on blockchain. How, then, did he go from that level of knowledge and belief to arguing on CNBC that we don’t need crypto?
Gensler is protecting someone, but it’s certainly not the American investors who will eventually not have any service providers left. Nor is it the crypto companies that are relocating to friendlier jurisdictions. It’s the Wall Street incumbents that crypto threatens. It’s hard to review the increasingly erratic regulatory approach and draw any other conclusion. To wit:
- America is one of the few major countries without a Bitcoin exchange-traded fund (EFT). Several companies have tried to issue one, but the SEC has refused to approve any, arguing crypto markets are unregulated. This is an odd defense because the agency has already approved futures-backed ETFs that buy derivatives tied to those markets, products that are guaranteed to underperform due to their added frictions. But they do keep incumbents like the Chicago Mercantile Exchange and its related brokers relevant.
- The SEC has designated stablecoins as securities, a ruling that kills their utility as payment products. Stablecoins should not be controversial. They use a familiar model, expand the dollar’s reach, and create additional demand for Treasurys. The only entities they are bad for are the legacy banks and centralized payment providers that dominate that industry.
- The agency has argued that public companies that custody crypto for others should treat them as on-balance sheet liabilities and set aside added reserves. This approach — which does not apply to other assets — makes offering crypto custody cost-prohibitive for all but the biggest custodians.
- Crypto offers novel ways for startups and decentralized projects to raise money from would-be customers and users, reducing funding costs and expanding financial inclusion. But the SEC has repeatedly insisted on expensive registration regimes that force crypto back into the investment bank-led fundraising system.
- Trying to cram digital assets into existing regulatory frameworks designed for stocks and bonds limits their utility but is a boon to Wall Street incumbents who already have the requisite licenses — licenses that have been practically impossible for startups to get. The only exception? The highly dubious Prometheum Capital, whose acquisition of a useless license proves this point.
- Recent rulings on which kind of service providers can be considered “qualified custodians” seem designed to deprive state financial authorities of their ability to charter smaller players who tend to be crypto natives.
- After filing a civil suit against Binance, the largest global crypto exchange, the SEC tried the added step of requesting the government freeze all assets on its domestic entity, effectively putting it out of business.
- The Coinbase suit argues that offering software to people who want to store their own crypto assets should be limited to registered broker-dealers. If held up, this rule would effectively kill crypto’s killer app of self-custody, forcing all investors back into the arms of intermediaries.
Enacting strict rules can create powerful moats for incumbents — the dirty secret of every highly regulated industry. Large companies might complain in public about the cost of compliance but secretly appreciate the competitive advantage of being on the other side of the regulatory divide. It’s one reason that highly regulated industries such as finance or healthcare seldom see turnover at the top.
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Protecting the status quo is also the only plausible explanation for why the SEC is against Congress clearing things up via legislation. Gensler repeatedly says securities laws passed in the 1930s and the Howey test — a Supreme Court decision handed down before the invention of the transistor — provide all the clarity his agency needs to regulate crypto. The rest of the world is not taking this approach, perhaps because their legacy service providers are not as prominent as America’s.
Tellingly, some regulators inside the U.S. disagree with this approach, including other SEC commissioners.
Five years ago, at a speech given at an MIT blockchain event, Gensler said “blockchain technology” had “real potential to transform the world of finance.” He added, “It could lower costs, risks, and economic rents in the financial system.”
The technology hasn’t changed in that time, but Gensler has. It’s only fair to ask whose interests he is protecting.
Omid Malekan is an adjunct professor at Columbia Business School and the author of Re-Architecting Trust: The Curse of History and the Crypto Cure for Money, Markets, and Platforms.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.