{"id":4298,"date":"2021-12-02T09:00:00","date_gmt":"2021-12-02T15:00:00","guid":{"rendered":"https:\/\/blogs.luc.edu\/compliance\/?p=4298"},"modified":"2021-12-02T09:00:00","modified_gmt":"2021-12-02T15:00:00","slug":"coinbase-proposes-a-new-regulator-to-oversee-digital-assets-after-feud-with-sec","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/compliance\/?p=4298","title":{"rendered":"Coinbase Proposes a New Regulator to Oversee Digital Assets After Feud with SEC"},"content":{"rendered":"

Patrick Gilsenan<\/em><\/span>
\nSenior Editor<\/em><\/span>
\nLoyola University Chicago School of Law, Weekend JD 2023<\/em><\/span><\/p>\n

In October 2021, the cryptocurrency exchange platform Coinbase released a proposal<\/a> for a regulatory framework that would designate a single regulator for the digital asset markets.\u00a0 This proposal comes less than a month after Coinbase\u2019s CEO had a public meltdown<\/a> on Twitter after the Securities Exchange Commission (SEC) sent the firm a Wells Notice, a warning of potential litigation, about their planned cryptocurrency lending platform allegedly violating securities regulations.\u00a0 As the digital asset market grows and the financial institutions involved become more influential, regulators continue to struggle with jurisdictional and definitional questions around the new products.<\/span><\/p>\n

<\/p>\n

Current regulatory framework<\/strong><\/span><\/p>\n

The new SEC Chair Gary Gensler has signaled his intent to more closely regulate the digital asset space under a securities framework.\u00a0 In a September 2021 hearing<\/a> before the Senate Committee on Banking, Housing, and Urban Affairs, Gensler testified that the SEC intends to fill gaps in the current regulatory regime by taking their \u201cauthorities as far as they go,\u201d that the SEC has \u201cbroad authority\u201d and that \u201cthe test to determine whether a crypto asset is a security is clear.\u201d<\/span><\/p>\n

Whether or not a digital asset can be regulated as a security is determined by the Howey Test<\/a>, which was established by the Supreme Court in 1946 via SEC v. Howey<\/em>.\u00a0 Under the Howey Test, a transaction is an investment contract (and thus subject to securities regulations) if 1) it is an investment of money; 2) in a common enterprise; 3) with the expectation of profit; and 4) any profit to be derived from the efforts of others.\u00a0 The SEC has issued guidance<\/a> on how it applies the Howey Test to digital assets, but as of yet there appears to be more gray area than clearly established lines, creating difficulties.\u00a0 Notably, however, the prior SEC Chair Jay Clayton has stated that Bitcoin<\/a> is not a security, as it does not pass the Howey test, but the SEC\u2019s guidance does appear to implicate initial coin offerings (ICOs) with an expectation of profit as securities.<\/span><\/p>\n

Outside of securities regulation, other regulators have a stake in digital asset regulation as well.\u00a0 Most notably is the Commodity Futures Trading Commission (CFTC), which regulates U.S. derivatives markets, and the National Futures Association (NFA), the industry self-regulatory organization under the CFTC.\u00a0 The CFTC has taken the position that Bitcoin is a commodity<\/a> and that they have jurisdiction when a virtual currency is used in a derivatives contract \u2014 a position that made the CFTC the sole regulator involved in cryptocurrencies as the CBOE Options Exchange and CME launched bitcoin futures<\/a> contracts in 2017.\u00a0 Coinbase has applied to the NFA for membership to be able to offer these derivatives on its platform as well.<\/span><\/p>\n

The meltdown<\/strong><\/span><\/p>\n

Coinbase\u2019s proposal for a single regulator for the digital asset markets comes as the firm finds itself under scrutiny by existing regulators, notably the SEC.\u00a0 In June 2021, Coinbase announced it intended to launch a crypto lending product called Lend<\/a>, which would have allowed its customers to earn interest on their cryptocurrency holdings and allowed Coinbase to loan out the holdings to other borrowers as a bank would.\u00a0 In September 2021, Coinbase CEO Brian Armstrong angrily tweeted<\/a> that the SEC had threatened to sue over the Lend program, and the firm\u2019s Chief Legal Officer followed up with a statement via blog<\/a> the next day.\u00a0 The blog specifically mentioned that the SEC \u201crefused\u201d to share their reasoning, and that they only represented that they assessed the Lend platform \u201cthrough the prism of decades-old Supreme Court cases\u201d including Howey.<\/span><\/p>\n

Legal experts say the SEC\u2019s case<\/a> against Coinbase\u2019s lending program was clear, however, and that it all amounts to disclosure requirements.\u00a0 Adam Letvin<\/a>, professor at Georgetown Law, pointed out that the SEC did not tell Coinbase that it cannot offer a cryptocurrency lending product, however \u2014 it only represented that if they did, they\u2019d have to register it with the SEC prior as all securities are required to be.\u00a0 Further, the SEC did not sue Coinbase \u2014 the Wells Notice that the SEC served was solely a courtesy notice that the SEC staff intends to recommend charges and provided Coinbase a window to make their case or make adjustments prior to avoid litigation.\u00a0 Instead, Coinbase has since updated its June blog to state that it is no longer launching Lend due to the scrutiny.<\/span><\/p>\n

To Coinbase\u2019s claims that the SEC owed them a dialogue, Letvin himself tweeted<\/a>, \u201cThe SEC doesn\u2019t have the obligation (or the resources) to issue guidance about things that should be obvious to a baby securities lawyer\u2026 It\u2019s really astounding that Coinbase thinks it\u2019s entitled to anything more.\u201d\u00a0 Additionally, Lee Reiners<\/a>, the executive director of the Global Financial Markets Center at the Duke University School of Law said \u201cwhen you ask a regulator if you can do something, and they tell you that something is illegal, that does not mean they are picking on you or singling you out. It means they are doing their job.\u201d<\/span><\/p>\n

Designing your own regulator<\/strong><\/span><\/p>\n

Not long after the public feud with the SEC, Coinbase has taken the position<\/a> that the current U.S. regulatory regime is incapable of effectively regulating digital currencies, and is proposing a new regulator for itself and other digital asset companies.\u00a0 The firm\u2019s Digital Asset Policy Proposal<\/a> argues for a new federal agency to consolidate digital asset regulations across other agencies and an SRO similar to FINRA or the NFA supervised by the new agency.\u00a0 The company has said<\/a> that \u201claws drafted in the 1930s to facilitate effective oversight of our financial system could not contemplate this technological revolution,\u201d and singles out securities laws for being too disclosure based to be appropriate for them.<\/span><\/p>\n

Coinbase\u2019s proposal has drawn criticism from multiple angles, and not only because it followed a spat with the SEC.\u00a0 Financial and legal experts<\/a> argue that a single regulator would add an unnecessary layer of complexity to the markets, and that a new regulator would only further silo the regulatory structure when more consolidation is called for.\u00a0 Advocacy groups like Better Markets described Coinbase\u2019s actions as regulatory capture, noting that it failed to capture the SEC and is out shopping for a new agency. \u00a0This appears to be supported by Forbes<\/a>\u2019 reporting that back in 2018, Coinbase provided testimony to Congress arguing the exact opposite position, when at the time Coinbase feared new laws that would add regulatory burdens to the industry.\u00a0 \u00a0\u00a0And further, smaller exchanges have been concerned with Coinbase\u2019s approach to regulation in general, noting that it may be harmful to the industry if Coinbase is the only company with a seat at the table<\/a>, guiding the regulatory environment for everyone.<\/span><\/p>\n

There does not seem to be an appetite for Coinbase\u2019s proposal for a new regulator, but change may be coming.\u00a0 The Biden Administration<\/a> has stated that it wants Congress to further regulate digital assets, but with existing agencies overseeing them.\u00a0 In response, the industry has ramped up its lobbying<\/a> efforts, spending $4.9 million in the first nine months of 2021 as compared to $2.8 for 2020.\u00a0 Additionally, former regulators<\/a> during the Trump administration such as former head of the CFTC Christopher Giancarlo and former acting comptroller of the currency Brian Brooks have joined the industry as advocates.<\/span><\/p>\n

The views expressed in this blog are those only of the author and not that of any employer.<\/span><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

In October 2021, the cryptocurrency exchange platform Coinbase released a proposal for a regulatory framework that would designate a single regulator for the digital asset markets.\u00a0 This proposal comes less than a month after Coinbase\u2019s CEO had a public meltdown on Twitter after the Securities Exchange Commission (SEC) sent the firm a Wells Notice, a warning of potential litigation, about their planned cryptocurrency lending platform allegedly violating securities regulations.\u00a0 As the digital asset market grows and the financial institutions involved become more influential, regulators continue to struggle with jurisdictional and definitional questions around the new products.<\/p>\n","protected":false},"author":65,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[26],"tags":[371,439,545,547,617,1065,1690,1788,1796],"class_list":["post-4298","post","type-post","status-publish","format-standard","hentry","category-finance-banking","tag-cftc","tag-coinbase","tag-crypto","tag-cryptocurrency","tag-digital-assets","tag-howey-test","tag-regulation","tag-sec","tag-securities"],"_links":{"self":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/4298","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/users\/65"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=4298"}],"version-history":[{"count":0,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=\/wp\/v2\/posts\/4298\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=4298"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=4298"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.luc.edu\/compliance\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=4298"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}