Regulation
SEC Exploits “Lack of Regulatory Clarity” in Crypto Crackdown
The US SEC has continued its crackdown on crypto this year, but the agency’s current leverage could also be its biggest weakness in the months to come.
In addition to ongoing litigation against companies like Coinbase and RippleGary Gensler and the US SEC issued Wells notices against Uniswap, Consensys and Robin Hood for alleged violations. The intention to sue concerns the broad cryptocurrency services offered by the three companies, but a specific scope concerns the second largest blockchain asset, Ethereum (ETH).
“Given the regulator’s general stance of considering most cryptocurrencies as securities, platforms such as Uniswap, despite its decentralized nature, may come under scrutiny for handling public trading activities. This, in turn, prompts the regulator to consider a registration and supervisory filing to ensure compliance with securities regulations.
Adam Berker, Mercury Senior Legal Counsel
Much confusion exists around the commission’s classification of Ethereum and its native currency, Ether. The president of the SEC regularly argued that cryptocurrencies fall under federal laws, citing the Howey test as proof.
That decision was abandoned in court during the agency’s long battle with XRP Ripple transmitter. Nonetheless, technological change could prove detrimental to Ethereum’s potential commodity status.
“The SEC has already lost the credibility of the Howey test during the Ripple trial. By priority, it could lose its attack against Uniswap and Ethereum. However, Ethereum’s move from proof-of-work to proof-of-stake will likely be the biggest differentiating argument the SEC could make since the Ripple lawsuit set no precedent for it.
Rudy De La Cruz, basedVC General and strategic partner
Crypto Hope Against the SEC
Over the years, crypto advocates and industry stakeholders have criticized Gensler and the Wall Street watchdog for taking a “regulation by enforcement” approach to crypto oversight.
Giants love Coinbase even took the commission to court, filing rulemaking petitions in federal court. While the lack of a U.S. framework on digital assets has arguably allowed Gensler’s agency to pursue massive lawsuits, things could change if Congress acts.
“The Security and Exchange Commission has the upper hand as a regulatory authority, and the lack of regulatory clarity in the United States is making the crypto market situation even worse. However, several bills have been introduced to end this problem.
Rudy De La Cruz, based at VC General and Strategic Partner
In 2022, two bipartisan pieces of legislation were introduced that could move crypto oversight away from the Gensler Commission. With the Digital Commodities Consumer Protection Act (DCCPA), the Commodity Futures Trading Commission (CFTC) would assume regulatory authority over digital assets.
If passed, the DCCPA would provide relief to Ethereum, especially since CFTC Chairman Rostin Behnam has publicly claimed that Bitcoin (BTC) and ether are raw materials.
The Responsible Financial Innovation Act (RFIA) could also provide much-needed clarity to agencies overseeing digital assets. Additionally, De La Cruz believed that the Digital Commerce Clarity Act and the 21st Century Financial Innovation and Technology Act of 2023 could help close regulatory gaps.
“If and when these laws take effect, the crypto market will have a fair chance to defend itself against attacks from the SEC.”
Rudy De La Cruz, based at VC General and Strategic Partner