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While Crypto Exchanges Seek Regulation, the SEC Eyes Punitive Steps

BY Eric James Beyer

August 17, 2022

As tensions continue to mount between the Securities and Exchange Commission (SEC) and crypto exchanges in the U.S., Coinbase has emerged as a symbol of regulatory resistance to what it sees as an unfair and highly-flawed approach to Web3 oversight.

After months of tough talk from SEC Chair Gary Gensler (who has repeatedly said he views the coin offerings on crypto exchanges as securities) and frosty interactions with Coinbase, the agency reportedly launched investigations into every U.S.-based crypto exchange this month, according to Forbes.

It’s a bold move that has rattled the Web3 world.

This move comes on the heels of a July complaint the SEC filed in federal court that listed nine tokens offered on Coinbase as securities. Rather unhelpfully, the complaint doesn’t specify why these particular tokens (which include AMP, DDX, DFX, LCX, POWR, RGT, RLY, and XYO) differ from others offered on the exchange.

However, with the exception of Coinbase (and perhaps Ripple, the company behind the XRP token), crypto exchanges and the projects behind many of the tokens under investigation remain relatively quiet on the SEC’s recent movements.

“Laws from the 1930s couldn’t predict crypto,” Coinbase tweeted the same day the SEC issued the complaint as it filed a petition with the regulatory agency to issue new and more modernized securities rules that work for everyone. 

In another July blog post by the company, Coinbase Chief Legal Officer Paul Grewal reiterated the platform’s position that “Coinbase does not list securities. End of story.” Grewal also said the Commodities Futures Trading Commission (CFTC) Commissioner Caroline D. Pham remarked that these investigations are a “striking example of ‘regulation by enforcement.’”

That’s a position many seem to share, including SEC Commissioner Hester Peirce. It’s worth noting, however, that U.S. Senators Cynthia Lummis and Kirsten Gillibrand have introduced a Congressional bill that would give the CTFC more authority to regulate crypto markets than the SEC if passed, so Pham’s position is perhaps unsurprising.

Regardless, it’s possible that exchanges and crypto coin projects are happy to let Coinbase stick its neck out as the posterchild of SEC pushback while taking a more compliant approach to the agency’s investigations themselves for the time being.

Several popular exchanges, including Coinbase, Kraken, and KuCoin, did not respond to a request to comment from nft now on the agency’s investigations and their views regarding them.

A spokesperson for Binance did offer nft now their thoughts on the investigations, however, saying: “As a company, we are focused on providing a superior product for our users, including by engaging collaboratively with authorities and regulators around the world. We take our legal obligations very seriously. We get inquiries from government entities from time to time, and we always cooperate with them.”

It would be difficult to render a more inoffensive position, but it’s likely the position the company feels it simply must take. Rather than risk legal action at the hands of the SEC, as Coinbase did when it tried (and failed) to launch its high-yield Lend offering last year, playing it safe through compliance by offering fewer tokens on their platforms could prove the better long-term strategy for these exchanges.

Crucially, whatever rivalries exist between them, these exchanges want the same thing: clearer and more appropriate rule-making for organizations in the Web3 space. How that will eventually come about is hard to say, as is how much damage Coinbase is willing to take before an answer emerges.

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