The SEC and crypto regulation Coinbase: Why is rulemaking taking so long?

Coinbase The Securities and Exchange Commission (SEC) of the United States has failed to propose simple measures to calm the growing uproar over cryptocurrency regulation. Many supporters have expressed concern that the rulemaking process could take years since the regulatory body looks to be “taking its time” to draught clearer legislation.

The SEC chief, Gary Gensler, is under the spotlight of the confusion around “providing clear guidelines to regulate crypto.” He has frequently spoken opinions that have been criticised by the crypto community. The existing ambiguity begs the question of whether the SEC and its chairs will actually propose clear laws in the future.

Coinbase requests additional guidelines for digital assets

On April 24, Coinbase filed a complaint, requesting that the SEC provide a firm response to the exchange’s request for the adoption of new regulations governing digital assets. The SEC officially reacted on May 16 by stating that rulemaking might take years.

They also made clear that enforcement efforts will continue. The regulator claimed in its petition that it was under no duty to comply with Coinbase’s criteria because the modifications were difficult and took time to complete. Therefore, they demanded that Coinbase’s petition be rejected.

The chief legal officer of Coinbase, Paul Grewal, responded to the regulator on Twitter, claiming that the filing may be the first time the SEC has expressed opinions about establishing regulations for the cryptocurrency business.

Grewal added that the response supported the industry’s call for additional clarification of the rules governing digital assets. He continued by saying that the SEC’s position on what falls within or outside of its purview still has to be defined and that it might change over time.

Grewal emphasised that the SEC has stated that the public should not depend on any public statements made by Gensler and that they should not be regarded as official guidance from the SEC.

Criticism of Gensler’s approach to cryptocurrency regulation

Gary Gensler, the SEC Chair, proposed that all cryptocurrencies other than bitcoin were securities in February 2023. However, as several crypto attorneys emphasised, Gensler does not decide how the law is applied. He has a point, but the law must be decided by the court.

Majority Whip Tom Emmer (MN-06), during a hearing of the Financial Services Committee on April 18, questioned Gensler on the SEC’s regulation-by-enforcement plan. Emmer claims that Gensler is “incompetent” and that he improperly regulated the cryptocurrency market by making public pronouncements.

What is security, and what isn’t, in the XRP case?

The Ripple v. SEC lawsuit may go down in history as a watershed moment for cryptocurrency regulation. When the SEC sued Ripple in December 2020 for selling XRP, claiming that it was an unregistered securities rather than a commodity, the situation got underway. Additionally, it was charged with using the sale of the token to illegitimately raise $1.8 billion.

Both sides attempted to find flaws in one another’s arguments as the dispute entered its third year. Ripple’s chief legal officer, Stuart Alderoty, criticised the SEC on May 13 for attempting to misinterpret the Howey test, particularly with regard to “common enterprise.”

The regulator had argued that the fungibility of XRP served as proof of common business. Alderoty emphasised that there is a distinction between “common enterprise” and “community of interest.” Alderoty claimed that as a result, the SEC was outargued.

LBRY claims that the SEC utilises unfair standards.

The SEC decided to modify the fine issued on LBRY, a cryptocurrency firm, in May 2023, citing financial concerns. The SEC fined LBRY $22 million in November 2022 for selling its cryptocurrency LBC in violation of the agency’s rules. They later amended it to $111,614 instead.

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Regarding the SEC ruling, LBRY charged it with using a false narrative.

A problem for the cryptocurrency business is the general lack of a defined regulatory framework for digital assets, as is demonstrated by the LBRY case.

Added ambiguity surrounding the Bittrex case

Six cryptocurrencies were labelled as securities by the SEC on April 18 as part of the Bittrex cryptocurrency exchange litigation. According to the lawsuit, the exchange violated the Securities Exchange Act of 1934 by failing to register with the SEC as an exchange, clearing agency, or broker-dealer.

The SEC must prove that at least one of the exchange’s tokens constituted a security for the lawsuit to move forward. Thus, they designated the following digital asset securities as being on the “non-exhaustive list”: Dash (DASH), OMG Network (OMG), Monolith (TKN), Algorand (ALGO), Real Estate Protocol (IHT), and Naga (NGC).

Despite the SEC’s assertion, none of the aforementioned tokens have, as of this writing, been issued with charges. The claims presented by SEC would not hold up in court, according to Lawrence Law attorney J.W. Verret, and the parties would reach a settlement. Verret asserts that the SEC is acting aggressively because a conclusive response would not be provided.

Due to regulatory uncertainties, Bittrex earlier in March stated that it would cease operations in the US by April 30, 2023.

House Republicans unveiled a draught plan in June 2023 to close the inadequacies in the current regulatory framework for cryptocurrencies.

There is an urgent need to establish clear regulations that protect investors and promote innovation and growth in the cryptocurrency market, as evidenced by the European Union’s aggressive approach to crypto regulations.