Shares of Coinbase Global fell sharply on Wednesday after the U.S. Securities and Exchange Commission warned that it would sue the crypto exchange company if it went ahead with a plan to allow users to earn interest by lending crypto assets. Beyond the blow to the growth plans of Coinbase (ticker: COIN), the move by the SEC signals a new phase in its enforcement actions. The agency is now questioning whether some of the fastest-growing parts of the crypto industry are legal at all. In particular, the SEC and other regulators seem concerned about crypto companies offering high-interest rates for people to lend out their assets, a service traditionally performed by banks.“The SEC has been flirting with crypto regulations for some time, but today’s news of Coinbase receiving a Wells notice from the SEC feels very much like the first salvo of a long and drawn-out conflict that may engulf the whole space,” said Webull CEO Anthony Denier, whose brokerage offers crypto trading.
BTIG analyst Mark Palmer wrote in a note after the Coinbase news that the SEC appears to be creating “regulation by litigation,” a problematic practice for the industry. If the SEC deals with crypto on a case-by-case basis, it could make it more difficult to launch products whose legality is not clear. Two of the five SEC commissioners, Hester Peirce and Elad Roisman, have warned that this approach is “not the best way to move forward.” “In this void, litigated and settled commission enforcement actions have become the go-to source of guidance,” they wrote in July. “People can study the specifics of token offerings that become the subject of enforcement actions and take clues from particular cases; however, applying those clues to the facts of a completely different token offering does not necessarily produce clear answers.”Crypto companies have worked nimbly with regulators before, but this latest move could spell trouble for the industry. Crypto is not overseen by a single regulator. Of the agencies that do oversee it, the Commodity Futures Trading Commission (CFTC) has arguably been more accommodating than the SEC. Former CFTC Chairman Christopher Giancarlo was even called “crypto dad.”
Divock Malevich
In this void, litigated and settled commission enforcement actions have become the go-to source of guidance