Coinbase Global (Nasdaq: COIN), a cryptocurrency trading platform, has been dealing with legal issues, but as if that weren’t difficult enough, the Securities and Exchange Commission has also presented challenges. According to reports, the regulatory body has been investigating the company to see if the assets listed on its exchange qualify as securities and as a result, fall within the SEC’s jurisdiction.
The action is related to the recent insider trading charge of Ishan Wahi, a former Coinbase product manager, his brother, and a business partner as a consequence of a Justice Department investigation. The law enforcement agents learned that Wahi had informed his friends about future listings on the exchange so they could protect their positions before the transaction.In connection with this, the SEC also filed a civil lawsuit against Coinbase, alleging that nine cryptocurrencies, including seven that can be purchased and sold on the exchange’s platform, are securities and should be subject to the agency’s strict oversight.
The company is contesting the SEC’s designation of the nine crypto tokens as securities, even though it appreciates the DOJ’s assistance in pursuing the three suspects. “According to our understanding, the SEC has filed separate securities fraud allegations concerning this violation. The department of justice (DOJ) did not file any securities fraud charges. The SEC allegations are an unpleasant diversion from today’s necessary law enforcement action, and no assets displayed on our platform are securities, the business stated on its website.”
The company claims the exchange is “the safest and easiest platform to use” and that it now offers “over 150 traded products.” It does, however, expressly state that none of the crypto assets listed there should be regarded as securities.
In response, Coinbase stated that it had petitioned the SEC for clarification of the regulations governing crypto securities since it believes it is the regulatory body’s responsibility to distinguish them from crypto assets. “A revised rulebook for crypto assets that are securities is required to help direct safe and effective procedures. Crypto assets that aren’t securities require the assurance that they’re exempt from those regulations, the company continued. However, the company believes that the SEC’s fraud allegations show that it “has little interest in this most essential duty of regulators.”
What then is cryptographic security?
Differentiating digital assets from what could be regarded as securities in the decentralized finance area is at the heart of the debate. SEC Chairman Gary Gensler thinks that digital currencies ought to be regarded as investment contracts under the law and ought to be regarded as registered securities. Coinbase, on the other hand, believes that a cryptocurrency is a commodity similar to gold and is not subject to the regulatory body’s jurisdiction, according to Jim McFadden, a contributor to The Deep Dive.
In a nutshell, the assets might be viewed as securities since they behave that way and because insider trading occurred on the exchange, supporting this claim. The regulatory authority bases its determination of whether a digital asset qualifies as a security on a 1946 US Supreme Court ruling: whether it entails investments financing a company’s activities so that investors can profit from the company’s successful operations.
But not all digital assets are created equal, according to Coinbase. It continues to argue that the SEC should provide clearer guidelines on how these should be regulated and further define how each asset should be classified, contending that the legal precedents the regulatory agency is relying on are mostly out of date. The company contends that “digitally native instruments do not work for the current securities standards.”
They are not employed by tokenized debt. They are not employed by tokenized equity. They are ineffective for crypto. And that’s a serious issue,” Shirzad continued. As a result, securities law is inadequate to regulate digital assets. The challenges caused by the attempted application of such inapplicable laws to cryptography include;
• The subset of crypto assets that are securities are not subject to regulation;
• There are too many intermediaries and stages for deals to settle in real-time;
• Trading without a broker is practically impossible for individual investors; and
• Even though this is the invention that gives distributed ledger technology its strength, blockchain technology cannot currently be utilized as a trustworthy record of transactions.
The commission has determined that Ripple’s XRP cryptocurrency, which is traded on a different exchange, is a security “despite years of taking no action against them,” according to Coinbase. After the asset lost much of its value due to the legal action, “investors large sums of money” were lost.
What distinguishes a crypto asset from security, then?
According to Carolyn M. Welshhans, Acting Chief of the Enforcement Division’s Crypto Assets and Cyber Unit, in the commission’s press release on the insider trading scheme, “Today’s case demonstrates, whether in equities, options, crypto assets, or other securities, we will vindicate our mission by identifying and combating insider trading in securities wherever we see it.”
However, Coinbase contends that the SEC ought to develop thorough regulations that “demand a true assessment of how crypto works differently from traditional financial instruments and what measures would protect investors who trade in crypto assets.”The company listed key distinctions between the cryptocurrency market and traditional exchanges, including the 24/7 nature of the former, direct access without the use of brokers or middlemen, and the ability of crypto assets to be linked to commodities and other asset classes outside the purview of the commission’s jurisdiction over securities.The turnaround time for traditional securities transactions to settle so the broker may safely hold customers’ assets, according to the business, is another significant difference.
These middlemen are required to ensure that trade occurs as promised using current technology. The trade must be correctly recorded, the buyer must make the payment, the seller must surrender the assets, and there must be no mistakes or unlawful acts, said Shirzad.
Due to the instantaneous and decentralized nature of cryptocurrencies, these regulations do not apply to them.
The precise custody regulations that regulate this system of intermediaries do not effectively use the advantages of blockchain technology and are ineffective for cryptocurrencies:
• The first is that one of the main features of cryptocurrency is that investors want deals to occur instantly. However, the existing regulations need too many stages to allow for a quick resolution.
• Second, for transactions to occur so quickly, the securities and funds need to be kept by the exchange so that it can intervene in the transaction as soon as it occurs. However, a cryptocurrency exchange is unable to hold assets in custody the same way a broker can while still carrying out quick trades.
• Lastly, the regulations governing how to safeguard assets—to demonstrate possession and control—are predicated on how you would safeguard a stock or bond, not how you may hold a private key for cryptocurrency securities.
As part of the ongoing effort by the digital asset space to establish the legitimacy of the sector, Coinbase maintains its belief that the SEC can harness the potential of cryptocurrencies through “appropriate regulation.” However, everything depends on how the commission will work to identify the asset and direct its enforcement-wielding arm to avoid regulating carelessly.
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