In the first part of this series, we cover the recent US Securities and Exchange Commission indictments against Coinbase and Binance, the inability to properly regulate the cryptocurrency industry, the history of digital assets in congressional records, and the number of references to cryptocurrencies. described a significant decrease. Digital Assets by the U.S. Government.
In this part, we delve deeper into the implications of the SEC’s actions and consider alternative approaches to cryptocurrency regulation that may benefit the industry and its investors.
Digital Assets Commission
Dedicated regulatory body dedicated to digital assets, recognizing the unique nature of digital assets, fostering innovation and protecting investors in the dynamic cryptocurrency world, with clear flaws in the current regulatory landscape is required.
A dedicated committee, perhaps called a Digital Assets Commission (DAC), is needed to oversee this rapidly evolving industry and develop nuanced regulatory guidelines that foster innovation while protecting investors. is becoming more and more apparent.
Howey test and its limitations
Established in 1946, the Howie test has long been used as the standard for determining whether an asset is considered a security under US law. This is the legal framework established by the U.S. Supreme Court to determine whether a transaction qualifies as an “investment contract” and is therefore subject to securities regulation.
The test consists of four criteria: investment of funds, joint venture, expectation of profit, and dependence on the efforts of others. If any criteria are not met, the asset will no longer be classified as a security.
I would argue that the Howey Test is not suitable for digital assets in 2023 given the rapidly evolving nature of cryptoassets and the diverse capabilities of these assets. The test began at a time when traditional investments such as stocks and bonds dominated financial markets, so they were ill-equipped to deal with the complexities and nuances of digital assets.
In the wake of the SEC lawsuit, Coinbase has released the following video highlighting its failed attempts to comply with U.S. regulatory guidance. In it, the company highlights the outdated nature of the Howie test, claiming that a million jobs are at risk due to lack of clear regulatory guidance.
One of the main limitations of the Howey test is its focus on profit expectations, which do not always align with the motivations of people involved in digital assets. Users may purchase and use cryptocurrencies and tokens for a variety of non-commercial reasons, including accessing decentralized applications, participating in governance decisions, and supporting specific projects and communities.
Moreover, the role of ‘efforts of others’ in the context of decentralized networks is often unclear. Because these networks rely on the joint efforts of many individuals and entities, they undermine the centralized control typically associated with securities.
Additionally, the Howie test does not take into account the technological advances and innovative features that digital assets currently have. Concepts such as smart contracts, decentralized finance (DeFi), and non-fungible tokens (NFTs) are upending traditional definitions of securities, and applying the Howie test to these assets will lead to over-regulation and stifling innovation. There is a possibility.
As the cryptocurrency ecosystem continues to grow and evolve, the limitations of the Howey Test are becoming increasingly apparent, highlighting the need for a more coordinated and nuanced regulatory approach that reflects the unique characteristics of digital assets. .
Impact of Classifying Digital Assets as Securities
The SEC indictment against Coinbase says the platform provided access to existing cryptocurrency securities and kept them “fully within securities law.” If digital assets were defined as securities, platforms like Coinbase would be subject to stricter regulation, hindering innovation and potentially limiting consumer access to a wide range of digital assets. This reclassification could have a significant impact on the entire cryptocurrency industry as it would require significant changes in how digital assets are issued, traded and managed.
Companies that issue digital assets must register with the SEC and comply with reporting and disclosure requirements, which can impose significant costs and administrative burdens on both new and existing projects.
In addition, increased regulatory scrutiny could scare potential investors, reduce funding for innovative projects, and hinder ecosystem growth.
For users, classifying digital assets as securities may limit the availability of certain assets on exchanges and trading platforms. This is because these platforms must comply with securities regulations in order to legally offer these assets.
This could result in lower liquidity, higher transaction fees and limited access to retail investors, especially in jurisdictions with strict securities laws.
Additionally, this reclassification could impact the development and adoption of decentralized finance (DeFi) applications and other innovative use cases for digital assets. These applications often rely on the unique characteristics of digital assets to function effectively.
Historically, the SEC has limited access to staking and DeFi to “accredited investors,” giving the general public the cold shoulder. For reference, his one criterion for an individual to be considered an “accredited investor” is to have assets of at least $1 million. So what you need is not knowledge or experience, only wealth. If your parents leave you $1 million, you are basically eligible for DeFi.
Other ways to qualify as an individual include earning $200,000 or more annually, a licensed financial professional, a family office, an executive at a company that sells securities, or a knowledgeable employee of a fund.
Defining a digital asset as a security could therefore have far-reaching implications for the cryptocurrency industry, affecting issuers, trading platforms, users, etc. alike. While the aim may be to protect investors and maintain the health of the market, this approach may stifle innovation due to an outdated view of digital financial instruments that can lead to rapid evolution and transformation. risk hindering the growth of sensitive sectors.
The Potential Impact of the Coinbase SEC Lawsuit.
The SEC lawsuit against Coinbase will have significant ramifications for the entire cryptocurrency industry.
If the SEC succeeds in establishing Coinbase’s conduct and the digital assets it listed are subject to securities regulation, it sets a precedent that could impact other crypto platforms and hinder the growth of the sector. would be However, Coinbase said it plans to fight the SEC in court.
The outcome of this lawsuit will shape the regulatory landscape for digital assets in the United States and elsewhere. If the SEC motion is upheld, other cryptocurrency exchanges and platforms could be forced to reassess their operations and listings, resulting in a wave of delistings, increased compliance costs, and a reduced range of tradable assets. can lead to This can hinder new entrants to the market and ultimately reduce competition and innovation within the industry.
Moreover, the lawsuit could trigger regulators in other jurisdictions to follow suit and impose similar restrictions on digital assets, impacting the global cryptocurrency ecosystem. This can lead to different regulatory regimes and asset classifications across different jurisdictions, fragmenting the market and making it difficult for companies and investors to navigate the industry.
On the one hand, Coinbase’s success in defending its position could encourage other crypto platforms to challenge existing regulations, paving the way for a more favorable regulatory environment for digital assets. .
When it comes to XRP, the Coinbase-Binance lawsuit has become the most important lawsuit in the industry.
Regulatory framework for digital assets
The regulatory framework for digital assets should be flexible enough to accommodate the diversity of the cryptocurrency industry while providing clear guidelines for platforms and users. It needs to be driven by a new committee, such as the DAC, led by digital asset experts. Gary Gensler teaches students on the subject of blockchain, but he has never used digital assets or his dApps.
Do you expect someone who has never used MetaMask to help you set up your wallet?
What if that person was leading all cryptocurrency regulation in the US?
A real digital asset framework should include creating distinct categories of digital assets that recognize unique attributes such as decentralization, programmability, and configurability.
Such a framework should also foster innovation and cooperation among industry stakeholders and regulators, fostering an environment conducive to the growth and maturity of the cryptocurrency space.
As regulators such as the SEC continue to grapple with this issue, it is important that the industry engages in open discussions about how best to move forward and promotes better regulatory frameworks that recognize the unique nature of digital assets. .
I don’t claim to know exactly what the proper framework should look like, but I know the SEC and CFTC don’t stand a chance.
Square pegs, round holes.
Set appropriate fees in the wake of the Coinbase and Binance lawsuits.
If digital asset securities are defined and governed by the Digital Asset Commission, the SEC lawsuit will reach the first hurdle, giving individual users a chance to participate in the future of DeFi in the United States.
