U.S. Securities and Exchange Commission reminds crypto industry through Coinbase initiative

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U.S. financial regulatory update

last weekGary Gensler, chairman of the US Securities and Exchange Commission, said that cryptocurrency trading platforms cannot last long outside the US regulatory framework. This week, it was clear that the SEC was serious.

Coinbase became the first publicly listed major cryptocurrency exchange in the United States in April, as stated in a blog post late Tuesday The U.S. Securities and Exchange Commission warned If the company launches a new digital asset lending product called Lend, it will sue the company and issue a subpoena to the trading platform for more information.

Lend will enable users to earn interest on certain digital assets on the platform. Paul Grewal, Coinbase’s chief legal officer, said that the SEC told exchanges earlier this year that it considers Lend to be a security, “but it did not explain why or how they came to this conclusion.”

As U.S. regulators scramble to keep up with the industry’s expanding growth, the US Securities and Exchange Commission’s move highlights the fierce legal debate at the heart of its approach to cryptocurrency platform supervision.

“In essence, this is an SEC jurisdiction issue,” said Charles Whitehead, a professor at Cornell Law School. “The question is whether these loan accounts are securities. If they are not securities, what are they and who will supervise them?”

The SEC’s role revolves around whether products such as Lend are “investment contracts”, making them securities under federal law. According to the so-called Howey test, the Supreme Court ruled that an investment contract exists when “a person invests his money in a common enterprise and expects to profit only from the efforts of the promoter or a third party”.

In a separate test called Reves, there is also the question of whether tools such as Lend are considered “notes” and then “securities.”

David Freeman, head of Arnold & Porter’s financial services business, said that although he wants the SEC to use these tests, regulators should also issue rules or guidance on how to interpret new encryption tools through a “formal process.”

“It is possible to make more deliberate decisions, not just a fight between the SEC and a company,” Freeman said, adding that “it is not good to make rules through enforcement actions” because it is not subject to judicial review or the public Constraints of opinions.

Coinbase’s announcement is that products that provide fixed returns for digital asset deposits have already Loved by consumers People who seek to benefit from cryptocurrencies but may be wary of volatile crypto markets or attracted by generous interest rates.

“This is about millions of people making plans around the legal status of these people [products],” Freeman said. “And it’s not good to pull the carpet out of them through enforcement action. “

Gensler expressed serious concerns about consumer protection in the “Wild West” cryptocurrency markets, which he said are “full of fraud, scams and abuse.”While urging Congress to give more explicit powers to regulators Monitor encrypted exchangesHe once called on the platform to register with the US Securities and Exchange Commission. In an interview with the Financial Times last week, he expressed disappointment at the response, saying that some crypto platforms “begged for forgiveness instead of asking for permission.”

The regulator issued a warning to Coinbase and reported that it is investigating the developers behind the decentralized exchange Uniswap, which has been seen by some in the crypto industry as a further sign that the SEC is turning its attention to revenue-generating products and Decentralized project Places that often generate returns.

Brian Armstrong, Co-founder of Coinbase

Coinbase, co-founded by Brian Armstrong, has been working together to make friends in Washington in recent months © Michael Short/Bloomberg

“It is not uncommon that the most influential cases are regulated first,” said Philipp Pieper, who started working on the DeFi project Swarm Markets in the United States and then moved to Germany to seek regulatory approval. He said that the uncertainty of the attitude of US regulators poses risks to those who build new projects and crypto companies.

In recent months, Coinbase has worked together to make friends in Washington. In May, CEO Brian Armstrong spent a few days in the city, where he met with Federal Reserve Chairman Jay Powell and several members of Congress.

Armstrong said on Twitter at the time: “The reaction was very positive (those who saw great potential), such as [the Democratic senator] @SenatorSinema and [the Republican member of the House] @PatrickMcHenry, acknowledging that skeptics raised thoughtful questions about illegal activities, I think it leaves a more open mind, for example [the Democratic senator] @MarkWarner, and everyone in between. ”

None of Armstrong met with a request for further comment.

According to data compiled by the Political Response Center, the company has increased lobbying spending. In 2015, Coinbase spent US$55,000 on lobbying activities, but last year it increased to US$230,000. So far this year, it has spent $160,000.

As part of this initiative, Coinbase recently joined forces with three other companies-investment management company Fidelity, cryptocurrency investment company Paradigm, and payment company Square-to form a new lobby group called the Crypto Innovation Committee. CCI will not comment on the SEC’s actions.

A spokesperson for Sherrod Brown, the Democratic Chairman of the Senate Banking Committee, told the Financial Times on Wednesday: “The US Securities and Exchange Commission should take all necessary measures to ensure that investors are protected and the market is transparent.”

The US Securities and Exchange Commission did not immediately respond to a request for comment.

Additional report by Hannah Murphy

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