Well, as the saying goes, "First they ignore you, then they laugh at you, then they fight you... then you win" (people think Gandhi said this, but it's a misattribution).
For some time now, the crypto industry in the US has been shrouded in regulatory uncertainty and contention. Requests for affirmative regulation and recognition from the US Securities and Exchange Commission (SEC) have largely been ignored. Many think this stance jeopardises US innovative capital and the opportunity to foster a multi-trillion dollar global financial industry enhanced by blockchain technology. It's as if merely entertaining the idea of a crypto industry would start to unravel the deep US institutional threads that make up the noose around global monetary policy… maybe it will.
So, why dose the United States take such issue with this new industry?
One explanation for its stance towards crypto appears to be rooted in protecting the entrenched power of the US dollar as the world's foremost reserve currency (see the 1994 Bretton Woods agreement). Anything that challenges the omnipotent position will certainly face severe resistance, and this is precisely what cryptocurrencies are doing. They operate on a decentralized network that conducts transactions globally without the need for financial intermediaries or reliance on the US dollar.
More broadly, cryptocurrencies are also challenging the current fiat currency system. Fiat simply translates to "it shall be,". Its basically a government decreeing that the money they print - an uncapped unlimited amount - has value, derived from the relationship between supply and demand and the stability of the issuing government. A $50 bill is worth $50, not because it’s valued against any real world commodity like gold, but because the government ‘say’s so’. This centralised system is highly inflationary and is at risk of counterfeiting (giving inaccurate money supply volume) and disruption due to government instability e.g. the Zimbabwe Dollar.
Recently the SEC has let the world know exactly how it feels about crypto….. it hates it.
Binance and Coinbase have been sued by the SEC for operating exchanges that offered unregistered securities, among other things. However, it should be noted that the crypto industry has been seeking clarity in order to comply with regulations for a while now.
In July 2022, Coinbase filed a petition with the third Circuit Court of Appeals to compel the SEC to issue regulatory rules for the cryptocurrency market. After waiting for nine months without any response from the SEC, Coinbase sued them in April 2023 to force them to make a decision. However, before the court could rule on the matter, the SEC has since sued both Coinbase and Binance.
The SEC basically gave the crypto industry the ‘silent treatment’ until it was compelled to give an answer, to which it replied, ‘i’ll see you in federal court’.
Where did this neglect for an infant industry crying out for regulatory clarity come from?
Well, there was a significant leadership change within the SEC that ushered in a different attitude towards crypto. Gary Gensler became the new SEC chairman in April 2021. Coinbase coincidentally went public on April 14, 2021, the same day that Gary Gensler was confirmed by the US Senate to lead the SEC. Prior to Gensler's appointment, the SEC had approved Coinbase's S1 and allowed them to go public, but with a new sherif in town, things were going to get difficult for the digital asset exchange.
Coinbase, a publicly traded company, repeatedly approached the SEC for guidance on what they needed to do to comply with regulations and implement changes, Gensler refused to provide any affirmative guidance or work with Coinbase. Instead, legal action was taken, causing a material drop in Coinbase's stock price. Gensler’s wrath is seemingly unaligned with the SEC's mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Appointed by democratic president Joe Biden, the optics of Genserls appointment looks to facilitate and maintain the current regulatory framework to allow the US’s FedNow payment system to reign supreme, potentially opening a pathway for a US central bank digital currency (CBDC). Though, given the turmoil that the crypto industry has witnessed over its 10+ year history, the SEC would be able to justify this enforcement approach. But this wouldn’t be conducive to growing the innovative sector for a digital future.
The good news is, the SEC has five Commissioners who are appointed by the President of the United States with the advice and consent of the Senate, and not all of them share the same views as the current chairman.
SEC Commissioner Hester Peirce recently discussed a rational approach to create regulatory frameworks for the rapidly evolving digital asset sector. In a recent interview on the Unchained Podcast, she describes a need to unpack each of the issues that plague crypto with input from the industry. In a hypothetical question, asked if she could set the SECs agenda on crypto, she would develop position papers on discrete issues around crypto, such as disclosure requirements for token purchases, trading platform rules, custody of digital assets, and regulation of stable coins. Suggesting the agency could work with the industry and have discussions and dialogue to assess their approach and implement what is agreed upon. So, rather than waste time and money on litigation and enforcement of the Howey Test framework from nearly 100 years ago, it would make sense to build a collaborative framework for businesses to identify which regulatory regime they fit in for this new digital asset sector.
The primary fear among businesses, consumers, politicians and some within the SEC is impending mass exodus of human innovative capital and companies away from the US. Rational actors who’s business involves digital assets will not consider setting up shop in the US as regulators seem to be making no effort to revise and review their current regulatory framework. Jose Fernandez da Ponte, the Senior Vice President of Blockchain, Crypto, and Digital Currencies at PayPal and Venmo raised his concern on the Bankless Podcast suggesting there is a risk of the US falling behind in digital currencies compared to other countries . This is due to a lack of regulatory clarity and a complicated environment that is driving consumers, crypto developers and companies offshore, creating a disadvantage for the US.
Events like the current lawsuits against Binance and Coinbase will provoke an answer that the crypto industry has been waiting for, some direction at least. Regardless of which way these court decisions go, we will get an answer to which the industry can respond. What's clear, is that the crypto industry will, and continues to, push through these growing pains.