Coinbase has had a torrid period since tech stocks peaked in November

Coinbase and the SEC

Like everyone else in cryptocurrency, Coinbase has had a torrid period since tech stocks peaked in November. The cryptocurrency exchange lost more than 88% of its value between that date and May of this year. While the share price has managed to stabilize over the past 10 weeks, news that the US Securities and Exchange Commission (SEC) intends to launch an investigation into the company has seen the share price drop by more than 21%. wiping out recent earnings.

Define cryptocurrencies

The SEC investigation addresses concerns that the platform was offering unregistered securities to its clients. This suggests that the company illegally allows users to trade digital assets, which the SEC said should have been registered as securities. It appears the SEC has several tokens in mind that were at the center of a recent insider trading case brought by the SEC against a Coinbase employee and its associates. Paul Grewal, Coinbase’s Chief Legal Officer, believes the platform does not offer securities and the company challenges the SEC for not providing clearer rules in defining cryptocurrencies.

Regulators

If there is concern that a particular cryptocurrency offer is a scam, the investigation would initially fall under the jurisdiction of the Federal Trade Commission. But that aside, the regulatory question is basically whether a cryptocurrency is a commodity / currency, in which case it would be regulated by the Commodity Futures Trading Commission (CFTC), or whether it is more like a stock, and therefore a security. In the latter case, the cryptocurrency in question would be regulated by the SEC. The difficulty in assigning which fund each crypto belongs to is that many crypto projects are funded by the sale of highly speculative tokens. SEC Chairman Gary Gensler said that “many of these underlying tokens have the attributes of securities,” which, if so, would require comprehensive and adequate regulation and supervision to protect investors. During the insider trading lawsuit, the SEC wrote: “A digital token or crypto asset is a crypto security if it meets the definition of a security, which the Securities Act defines as including an” investment contract, “… if it constitutes an investment of money, in a joint venture, with a reasonable expectation of profit from the efforts of others.

And bitcoin?

According to former SEC chairman Jay Clayton, cryptocurrencies like Bitcoin and Ether that replace “sovereign currencies” are not stocks. But the digital assets and tokens used in the initial coin offerings are. This appears to be consistent with the SEC’s current approach. Of course, how profits and losses are taxed complicates matters, but it is a problem for the Internal Revenue Service. Putting all of this together shows that the current cryptocurrency asset regulation is a bit of a mess. And that’s before considering how other countries treat them.

The Troubles of Coinbase

The Coinbase sale itself reflected fears that the ailing platform could be hit with a large fine, or worse. But there are implications for the entire cryptocurrency universe. Unlike many regulators, SEC Chairman Gensler has a reputation for taking decisive action and doing it quickly. His decision to regulate tokens will be seen as a blow to the head in a largely unregulated industry. This could certainly skew the style of many current players, but many would say it’s a good thing if it leads to greater investor protection. The world of cryptocurrencies is certainly a new frontier when it comes to innovation and investment opportunities. But it also has a lot in common with the Wild West. There is no doubt that this is the latest product to capture the imagination of people who are looking to get rich quick. As a result, it has suffered serious reputational damage given the number and nature of the scams that have been built into it. But it is much more. There are so many potential applications for cryptocurrencies and blockchains in the future. But these must be built on a solid foundation. Reasonable regulation that helps ward off cowboys but allows serious players to keep the industry going should be a good thing. Cryptocurrencies are well known for their volatility, with dramatic up and down price movements. The market is currently experiencing one of its periodic crashes and once again the Cassandras are out of steam, anticipating its imminent demise. But there is no reason to believe that cryptocurrencies are about to disappear. So hopefully thoughtful regulation will help encourage this nascent market rather than crush it.

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