SEC: Delist Everything Except for Bitcoin

The US Securities and Exchange Commission (SEC) told Coinbase that most of the digital tokens it has listed are unregistered securities that fall under its jurisdiction and it should delist them all. In a recent interview with the Financial Times, Coinbase CEO Brian Armstrong revealed that the SEC asked his company to stop trading in all cryptocurrencies other than Bitcoin, before suing the exchange in June for operating as an unregistered securities broker.

SEC makes a distinction between Bitcoin and other cryptos.

While the SEC has not provided a clear explanation of how it determines which cryptocurrencies are securities, the legal framework provided by the Howey test does this quite explicitly. Derived from a 1946 Supreme Court case the Howey Test has 4 requirements:

1. Investment of money.
2. In a common enterprise.
3. With the expectation of profit.
4. From the efforts of others.

What are the arguments supporting the SEC’s position?

The SEC argues that its enforcement actions are necessary to protect investors from fraud and manipulation in the crypto market, which it considers to be a “Wild West” with no rules or oversight. The SEC also claims that it is upholding the rule of law and ensuring a level playing field for all market participants, regardless of the technology or innovation involved.

Some of the arguments in favour of the SEC’s position are:

• The SEC is fulfilling its statutory mandate to regulate securities markets and safeguard investors’ interests.
• It is providing clarity and certainty to the crypto industry by applying existing securities laws and precedents.
• The SEC is preventing unfair and abusive practices by crypto issuers and platforms that may harm investors or undermine market integrity.

What are the arguments opposing the SEC’s position?

The crypto industry and its supporters have been challenging the SEC’s position, arguing that it is stifling innovation and growth in the crypto space, which they see as a new frontier of technological and financial development.

Some of the arguments against the SEC’s position are:

• It is overstepping its authority and jurisdiction by applying securities laws to cryptocurrencies that are not securities but commodities, currencies, or utility tokens.
• The SEC is hindering innovation and competition by imposing excessive and outdated regulations on crypto projects that are not comparable to traditional securities offerings.
• Regulatory ambiguity is creating confusion and uncertainty by failing to provide clear and consistent guidance on how it classifies and regulates cryptocurrencies.
• The SEC is harming investors and consumers by limiting their access and choice to crypto products and services that offer more efficiency, transparency, and inclusion than traditional financial systems.

Regulators battle in turf war: SEC vs CFTC

The regulatory battle between the SEC and the Commodity Futures Trading Commission (CFTC) is another source of complexity and controversy in the crypto space. The CFTC is a federal agency that oversees derivatives markets, such as futures and swaps, and has asserted its authority over some aspects of the crypto market, such as Bitcoin futures contracts and platforms that offer them.

However, there is an overlap and a conflict between the SEC and the CFTC’s jurisdictions, as some cryptocurrencies have been claimed to be both securities and commodities, depending on who you ask. For example, Ethereum (ETH) has been claimed by both agencies as falling under their respective domains.

This battle between the SEC and the CFTC has created confusion and uncertainty for crypto businesses and investors.

Complexity in the USA; The World Keeps Turning

While US regulators quarrel, and the SEC undertakes a broader crackdown on cryptos as well as continuing to reject Bitcoin ETF applications, the rest of the world has moved on and listed Bitcoin listed funds:

• Brazil
• Canada
• Australia
• France
• Switzerland
• Germany
• Netherlands

Bitcoin ETFs are seen as a way to provide easier access and exposure to Bitcoin for mainstream investors, who may prefer a regulated and convenient way to invest instead of self-custody. However, the SEC has rejected every single Bitcoin ETF application to date, ostensibly due to concerns about market manipulation, fraud, and investor protection. Nobody believes this.