Editor’s note: Mergers & Money is a monthly column by Senior Reporter Chris Metinko that covers dealmaking and the flow of venture capital.
Although crypto historically has tried to shirk some labels—like those of “trend” or “fad”—the industry seems ready for one from the U.S. government.
While most people are fixated on the big declines cryptocurrencies have seen during the current “crypto winter,” perhaps the most interesting turn in the industry happened last month when the U.S. Securities and Exchange Commission filed an insider trading case against a Coinbase manager and two others who declared nine digital assets on the exchange platform were securities.
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Why does that matter? Because it made what was murky even more opaque in terms of how the U.S. will categorize crypto and which agency will regulate it.
Commodity vs. security
It’s probably important to have a cursory understanding of the differences between commodities and securities before delving too much further into why it’s important to crypto.
In layman’s terms, a security produces return from a common enterprise or company. Commodities are typically a “basic good” that can be bought, traded or exchanged—think grain, beef or gold. Commodities often are considered stores of value because they hold their value over time—unlike, say, shares of Webvan back in the day, which were securities.
Some crypto assets such as Bitcoin certainly share the traits of a commodity. They are by their very nature designed to be decentralized and therefore do not produce a return from a common enterprise or company. Cryptocurrencies also were created as something that can stand in place of money, like the U.S. dollar, which makes it a store of value.
Those traits have led to crypto being regulated by the Commodity Futures Trading Commission—not the SEC.
That position has only seemed to be strengthened by newly proposed bills such as this month’s Digital Commodities Consumer Protection Act of 2022 and the Responsible Financial Innovation Act announced in June, which seek to put new regulations on the growing digital assets space but seemingly would keep the industry under the purview of the Commodity Futures Trading Commission.
So what’s up with the SEC and Coinbase?
That’s what makes the SEC charges concerning to the industry. SEC Chair Gary Gensler has issued stern warnings and offered skepticism about the digital asset market in the past. While agreeing Bitcoin is a commodity, Gensler points out things like initial coin offerings bear more than a passing resemblance to securities since they are attempts to raise capital for a business or project.
Being viewed as a security could change the industry. Commodities are generally considered more lightly regulated, while securities demand greater transparency and increased reporting by companies in that market.
For that reason, the general feeling is it would be a win to keep crypto under the CFTC’s view.
For its part, Coinbase made clear where it believes it stands regarding the SEC action.
“Coinbase does not list securities on its platform. Period.” wrote Coinbase’s Chief Legal Officer Paul Grewal in a blog after the SEC announced charges.
The SEC action even attracted the attention of CFTC Commissioner Caroline Pham, who tweeted the action was “a striking example of ‘regulation by enforcement’” by the SEC.
“The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together,” she added.
Where we are
Where the SEC’s action and the increased talk this year of crypto and regulations lead is anyone’s guess. However, it seems likely the discussion of how crypto and digital assets are defined and categorized is only starting.
“I think this is the beginning of this debate as to how it’ll be regulated,” said William Powers, a partner at Nossaman LLP who has worked with crypto advocacy groups concerning lobbying compliance.
Powers said while crypto regulation bills have been proposed, President Joe Biden’s executive order on crypto from March asked for a report from all relevant government agencies on the future of money and payment systems—so the conversation is still very much evolving.
It also is possible crypto may not fit with any definition and needs to be regulated in a different way—something many in the industry believe. Even Gensler said earlier this year his agency is considering how to share oversight of the industry between the SEC and CFTC.
Although that may make sense, both agencies are overseen by different senate committees, so that may be a difficult road to map.
One thing that is certain is that from investors to founders to anyone else in crypto, nearly everyone would just like to know the rules moving forward—be it labeled a security or commodity.
Investors, for instance, hate uncertainty. While the crypto venture market has stayed robust this year—with more than $10 billion invested so far, according to Crunchbase data—those in the market undoubtedly would like answers sooner rather than later.
“The common theme is people want clear rules,” Powers said. “They want to know what definition applies. They want clarity.”
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Illustration: Dom Guzman
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