The largest US financial watchdog has labelled nine cryptocurrencies as securities, which means they are now subject to securities laws. The Securities and Exchange Commission (SEC) has been criticised for focusing on enforcement rather than providing legal guidance.
The link with Coinbase
The nine cryptocurrencies are all offered by the US-based Coinbase. They are:
- Flexa’s AMP
- Rally’s RLY
- DerivaDEX’s DDX
- XY Labs’ XYO
- Rari Capital’s RGT,
- LCX, the governmental token of an exchange in Liechtenstein
- Power’s POWR
- DFX Finance’s DFX
- Kromatika Finance’s KROM
So all these tokens are offered on Coinbase and hosted on Ethereum’s blockchain. When you read the indictment, it is no coincidence that precisely these ‘Coinbase-coins’ are named.
Part of the indictment
There is more to it than simply labelling nine coins. The SEC has launched a case accusing a former Coinbase employee and two associates of insider trading. The same complaint states that at least nine of the cryptocurrencies on Coinbase should be covered by securities laws.
Many in the crypto industry saw this as an example of regulation through enforcement. In other words, the SEC wants to flex its muscles.
SEC wants to regulate cryptocurrency
The filing marks one of the few instances where specific crypto currencies have been deemed securities by the SEC. In the past, the SEC has refused to clarify the legal status of many cryptocurrencies while constantly claiming that many cryptocurrencies should fall under their purview.
A perfect example of this is the lawsuit against Ripple. Since December 2020, the SEC and Ripple have been engaged in a legal battle over whether XRP is a security or not. After almost two years of litigation, the SEC has yet to convince the judge. Of course, it helps that Ripple has deep pockets and can, therefore, deploy a lot of legal clouts.
Criticism of the SEC
Back to the indictment. Coinbase responded to the SEC through a blog post requesting that a regulatory framework for cryptocurrencies be “guided by formal procedures and a public process of notice and comment, rather than by arbitrary enforcement or guidance developed behind closed doors.”
Not only commercial parties from the crypto industry are critical of the SEC, but Caroline Pham from the Commodities Futures Trading Commission (CFTC) doesn’t get it either. She shows her displeasure on Twitter.
Read my statement on #SEC v. Wahi, regulation by enforcement & #CFTC authority #crypto #digitalassets #DAO pic.twitter.com/xbHvyshx8l
— Caroline D. Pham (@CarolineDPham) July 21, 2022
“The SEC v. Wahi case is a striking example of ‘regulation by enforcement,” Pham wrote before claiming that the SEC’s allegations could have “broad implications” beyond the case itself.
Nine lawsuits
Her sentiment was shared by Jake Chervinsky, the head of the Blockchain Association’s policy, who said the case was a “mess” that would likely require “nine mini-trials” to determine whether each token is truly a security.
Criticism of the SEC is also coming from politicians. Republican Tom Emmer criticised the SEC during a congressional hearing for “using enforcement to expand its jurisdiction,” calling the agency “power-hungry” and “hellbent.” Emmer said the SEC is doing everything it can to achieve its political goals at the expense of the crypto industry.
The SEC’s Gurbir Grewal admitted during the hearing that the regulator has routinely acted against crypto industry participants in ways that may be beyond its jurisdiction.
The SEC alleges in today's complaint that nine digital assets are securities, but don't explain their analysis for even one.
They also didn't sue the issuers or exchange where the tokens traded: the people with resources to fight back.
They just went after one man & his family.
— Jake Chervinsky (@jchervinsky) July 21, 2022
🚨The SEC Director of Enforcement admits the SEC is cracking down on companies outside its jurisdiction. Absolutely unacceptable. pic.twitter.com/wRQU54Ov6v
— Tom Emmer (@GOPMajorityWhip) July 19, 2022
