Widely circulated reports that the U.S. Securities and Exchange Commission (SEC) is investigating $20 billion crypto exchange Coinbase are just the tip of the iceberg, according to a staffer from U.S. Senator Cynthia Lummis’ (R-Wy) office. The staffer says every U.S. crypto exchange—and the largest crypto exchange in the world, Binance—are in various stages of being investigated. There are more than 40 U.S. cryptocurrency exchanges, according to crypto data site, CoinGecko. The SEC has not responded to multiple requests for comment.
Coming in the wake of a number of SEC actions asserting the regulator’s domain over the crypto industry, and an equally strong response by the U.S Commodity Futures Trading Commission (CFTC) pushing back against what it characterizes as “regulation through enforcement,” the staffer says the SEC urgently wants to resolve its dispute with the CFTC over crypto jurisdiction. If the matter isn’t resolved internally, he says legislators would have to get involved, and that Congress is likely to side with the CFTC.
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In 2014, long before ethereum and pretty much any cryptocurrency other than bitcoin and its early copycats existed, the CFTC asserted its jurisdiction over what it then called “virtual currencies.” Then, in 2018, a Federal Court ruled that the CFTC could prosecute fraud cases involving virtual currency, according to a CFTC statement. Similarly, the SEC has multiple times asserted that bitcoin is a commodity. And in June 2018 SEC director William Hinman said in a speech that he didn’t think ethereum was a security, implying it might properly be under the CFTC’s jurisdiction.
Evidence that the situation might be changing started to emerge in June when Gary Gensler, the SEC chairman, implied that ethereum was a security when he said bitcoin was the only cryptoasset he was comfortable calling a commodity. It’s of note that while ethereum itself wasn’t included in the list of nine assets the SEC said was a security in its insider trading allegations against former Coinbase employee, his brother and his friend, the SEC specifically mentioned each of the assets were created on the ethereum blockchain.
Perhaps self-servingly, the source described the conversations between the SEC and CFTC as not particularly fruitful, arguing that the final decision about who gets what authority will likely fall in law-makers’ hands.
Yesterday, U.S. Senators Debbie Stabenow (D-MI), Chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, and ranking member John Boozman (R-AR), introduced the Digital Commodities Consumer Protection Act of 2022 to give the CFTC new powers to regulate digital commodities. Senator Lummis herself co-sponsored with Senator Kirsten Gillibrand (D-NY), the Responsible Financial Innovation Act, a bipartisan legislative proposal for the regulation of digital assets that is even more comprehensive in scope.
Ironically, Senator Lummis’ staffer gives both bills a less than 50% chance of being passed this year. The only way either bill would pass this year is if a catastrophic black swan event, like a major U.S. exchange collapsing, could rally lawmakers, he says. The most likely crypto bill to see traction before the year’s over is the recently delayed stablecoin bill that describes how banks might be allowed to issue their own stablecoins, which the source says could be attached to the appropriations bill by the end of the year.
A senior executive at a large cryptocurrency exchange also said, on background, that based on chatter he’s hearing from members of the SEC, many U.S. cryptocurrency exchanges have likely received Wells Notices used to formally inform companies when an action is about to be brought against them, and that most are under investigation. Binance.US de-listed one of the assets listed by the SEC earlier this week.
The executive said these instances are separate from standard procedure the SEC regularly conducts—for example—asking exchanges if they’ve had any communication with the team that created a newly listed asset, are in touch with anyone raising money for the newly listed asset, or if the team ever made representations about how the token might accrue value.
The executive further says the SEC hasn’t historically asked about forks of bitcoin like litecoin, but based on recent comments to the House Appropriations Committee that bitcoin “may” be a commodity, that could change soon.
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