The Commodity Futures Trading Commission’s (CFTC) action against Binance on Monday surprised some and irritated others. Binance users, such as US-based prop shops with offshore accounts and BNB token holders, are among those who are irritated. But, more importantly, it is those who want the United States to create a comprehensive framework for cryptocurrency and to stop ruling by enforcement.
U.S. Rep. Tom Emmer (R – Minnesota) introduced the Securities Clarity Act in 2020, a calendar year ago but centuries in crypto time, with the goal of creating a new legal category called “investment contract asset.” “This new term would refer to any asset sold as part of an investment contract that would not be considered a’security’ but for its sale as part of an investment contract,” Emmer’s website stated in September 2020.
It was effectively a framework for crypto similar to what the Monetary Authority of Singapore has developed, or what authorities in Hong Kong and Taiwan are working on: rules made in the 2020s for an asset class of the internet era, rather than relying on an interpretation of a 1946 court case.
“The fact remains that digital assets such as cryptocurrencies do not fit neatly into the SEC’s regulatory framework,” wrote Bo Howell, an Ohio-based securities lawyer, in a January 2022 post explaining the disputed authority over crypto. Instead, we have enforcement-based regulation. Attempts to impose rules through court rulings rather than a rulebook available to all parties.
The SEC is attempting to establish a comprehensive definition for securities that includes the majority of cryptocurrency tokens as part of a legal proceeding involving an ex-Coinbase staff member accused of insider trading by pursuing securities fraud allegations against the former employee.
“The SEC’s suit is based on the incorrect assumption that the seven Coinbase-listed assets identified in its complaint are’securities.’ However, Coinbase does not list any securities on its platform,” according to an amicus brief filed by Coinbase in March as part of the case. “The SEC claims that digital assets are securities because they are “investment contract[s], but the assets lack both essential characteristics of that statutory term: they are neither contracts nor investments.”
In December, something similar occurred. As part of a complaint against FTX co-founder Gary Wang and former Alameda Research CEO Caroline Ellison, the SEC argued that FTX’s exchange token, FTT, is a security. The two are pleading guilty and intend to cooperate with authorities, which means the SEC’s allegations will not be tested in a courtroom.
The SEC has not provided Coinbase – or any other exchange – with anything resembling the rulebook they requested. There is no official code to read; instead, lawyers must interpret court filings and read the tea leaves to determine possible interpretations.
“This ongoing and ever-changing regulatory environment impedes well-designed compliance and regulatory plans,” Braden Perry, a former CFTC attorney, said in an interview with 2020.
His analysis is still valid today. “The last thing any industry wants is what the SEC and CFTC have done: regulation by enforcement,” he continued.
Rep. Emmer told CoinDesk in January 2023 that more legislation is on the way. Hopefully, the right kind, and not the kind that drives an industry offshore. “Obviously, we’re going to focus on legislation, and I think it’ll be to put key guardrails around the industry,” Emmer said. “Market structure barricades. Guardrails for stablecoins. That sort of thing.” Right now, this appears to be positive for Asia. China’s state-owned banks are soliciting crypto business in Hong Kong, which would be unheard of or even considered absurd if mentioned years ago.