Coinbase Challenges SEC's Inadequate Reason for Avoiding Crypto Rules

While the SEC tries to justify its lack of crypto rulemaking, Travis Hill believes that inadequate regulation could lead to the U.S. economy and bank customers missing out on certain benefits.

The battle over crypto regulation in the U.S. is intensifying as Coinbase escalates its legal fight against the SEC, seeking legal help to force the regulator into establishing clear crypto-specific regulations. Meanwhile, FDIC Vice Chair Travis Hill recently pointed out the potential risks and opportunities of blockchain technology, also advocating for much clearer regulatory guidance and consistency. Additionally, former President Donald Trump's recent remarks could suggest a major shift in his stance on cryptocurrency.

The Battle for Crypto Regulation Heats Up

Coinbase is escalating its legal confrontation with the U.S. Securities and Exchange Commission (SEC) by looking for judicial intervention to push the agency to start the process of formulating rules for the crypto industry. This move comes as Coinbase believes that the SEC violated the Administrative Procedures Act (APA) by not providing a good enough rationale for denying Coinbase's July 2022 petition for the establishment of crypto-specific regulations. Coinbase argues that SEC Chair Gary Gensler's stance—that existing securities laws are applicable to cryptocurrencies—fails to provide a "reasoned justification" for refusing to engage in rulemaking, describing the denial as "arbitrary and capricious."

Coinbase's contention mainly revolves around the SEC's very aggressive enforcement of securities laws against quite a few crypto companies without clearly explaining how these laws apply to cryptocurrencies. The exchange requested the court to overrule the SEC's decision and mandate the start of the rulemaking process.

Further complicating the matter is Coinbase's accusation that the SEC has also been inconsistent in its stance on its authority over cryptocurrencies. Initially, the SEC claimed to have "limited authority" over the crypto sector, pointing towards a "lack of clarity" in the legal framework. However, it later argued that it had sufficient authority to regulate the industry, a pivot that Coinbase argues should require Congressional approval.

This legal battle is part of a broader dispute, distinct from the SEC's June 2023 lawsuit against Coinbase for operating as an unlicensed exchange and offering unregistered securities. The crypto community holds its breath as the case unfolds because the outcome of this legal conflict will definitely have a major influence on the regulatory landscape for cryptocurrencies in the United States.

FDIC's Stance on Regulation

It is also worth noting that Travis Hill, Vice Chair of the U.S. Federal Deposit Insurance Corporation (FDIC), recently addressed the Mercatus Center think tank, and made it a priority to highlight the possible risks and opportunities posed by the regulatory approach to blockchain technology in the United States. Hill believes that inadequate regulation could lead to the U.S. economy and bank customers missing out on some benefits. He also acknowledged that the country is already at risk, with the FDIC partly to blame for this.

Hill discussed the advantages of tokenizing bank deposits and other real-world assets (RWA), like enabling financial transactions to happen at any time with real-time settlement. This would offer the programmability of payments, facilitating intraday repurchase (repo) exchanges, enhancing settlement times for certain bond issuances, and improving various other transactions. Programmable payments could also serve as an alternative to traditional escrow services for consumers.

However, Hill also raised several important questions about tokenization, including the choice between unified ledgers versus blockchain interoperability and the management of ownership rights as assets transition across the blockchain. He shared his concern about the U.S. losing influence in establishing global standards in this area as well, as many non-U.S. jurisdictions are actively busy with developing this tech.

Hill also warned of the potential for programmability to exacerbate settlement risks and facilitate faster asset transfers by consumers, which could lead to bank runs. In response to this concern, he suggested the need for an "off" switch to prevent these scenarios.

Very interestingly, Hill critiqued the lack of consistent policies and the inconvenient processes institutions have to navigate when they engage with regulators. He also criticized the FDIC's approach to treating all blockchain transactions, whether involving RWA or cryptocurrencies, the same.

Hill called for clearer guidance and consistency from regulators. He specifically criticized the Securities and Exchange Commission’s (SEC) Staff Accounting Bulletin 121 (SAB 121) for its broad definition of crypto assets, which could encompass tokenized RWAs, arguing that this requires financial institutions to treat crypto assets differently from other types of assets.

Trump's New Take on Crypto

Recent remarks from Donald Trump also made quite a few heads in the crypto space turn. In a CNBC interview, former President Donald Trump hinted that he might take on a more favorable stance on cryptocurrency should he return to the White House, which is quite a drastic shift from his previous skepticism.

Trump, who is running for president again, has not invested in Bitcoin himself quite yet, but did acknowledge its growing significance and even mentioned accepting payments in cryptocurrency for branded merchandise. This is once again a huge change from his term as president when he called cryptocurrency a "scam" and encouraged regulatory action against it.

Other Republican figures and presidential hopefuls, including Vivek Ramaswamy and Ron DeSantis, have also supported cryptocurrency, positioning themselves alongside independent candidate Robert F. Kennedy, Jr. in advocating for digital currencies. Meanwhile, the Biden administration has been criticized for its approach to cryptocurrency, with SEC Chair Gary Gensler facing particular scrutiny for the agency's rather questionable regulatory strategies.