The crypto industry is currently going through a crisis that has already crushed some major players like hedge fund Three Arrows Capital and lenders Celsius Network and Voyager Digital.
After losing over $2 trillion in less than nine months, the cryptocurrency market has more or less stabilized over the past few days. But it was also at this time that bad news was issued by the U.S Securities and Exchange Commission.
The regulator has announced that nine cryptocurrencies listed on the Coinbase (COIN) exchange, the most popular platform in the United States, are unregistered securities.
This decision, which took the industry by surprise, has important repercussions because tokens or coins have until now been considered non-securities. This means that they escape strict supervision by regulators and are not subject to the same rules of financial transparency and disclosures as shares in a company, for example. The listing process is also less strict than that of a security.
The SEC Causes an Outcry
A security is, according to the SEC, "an investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
The announcement came as the SEC and the Department of Justice filed charges against former Coinbase product manager Ishan Wahi and two others, accusing them of running an insider-trading scheme that earned them more than $1.1 million. Wahi allegedly tipped off his brother Nikhil Wahi and his friend, Sameer Ramani, about upcoming token-listing announcements on the crypto exchange.
"Ahead of those announcements, which usually resulted in an increase in the assets’ prices, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit,” the SEC said on July 21.
The nine tokens in question are: Flexa's AMP, rally's RLY, DerivaDEX's DDX, XY Labs' XYO, Rari Capital's RGT, the Liechtenstein Cryptoassets Exchange's LCX, Power's POWR, DFX Finance's DFX, and Kromatika Finances's KROM.
"Each of the nine companies invited people to invest on the promise that it would expend future efforts to improve the value of their investment,” the SEC argued. The regulator wants to refer to the famous Supreme Court judgment, known as the Howey Test, which deems an asset as a security if it meets certain criteria.
The SEC's decision drew a torrent of criticism from the industry, other regulators and lawmakers alike.
Coinbase, which could be penalized by the SEC for listing the nine tokens, said in a blog post that it had filed a petition with the SEC to improve "rulemaking on digital asset securities" to say how it would apply federal securities laws to crypto assets.
"The case SEC v. Wahi is a striking example of 'regulation by enforcement'," regretted Commodity Futures Trading Commission Commissioner Caroline Pham in a statement posted on Twitter.
'Think This Is Bad?'
It is in this context that Sen. Pat Toomey (R-Pa.) intervened.
"Yesterday’s enforcement action is the perfect example of the SEC having a clear opinion on how and why certain tokens classify as securities," the lawmaker tweeted. "Yet the SEC failed to disclose their view before launching an enforcement action."
"Think this is bad?" billionaire and the Dallas Mavericks owner Mark Cuban commented. "Wait till you see what they come up with for registration of tokens. That's the nightmare that's waiting for the crypto industry. How else do you keep thousands of lawyers employed and create reasons to ask for more taxpayer money? https://youtu.be/9fDiVXpWp1U."
The star of Shark Tank TV show accompanied his post with a YouTube link to a message left for him by the SEC after he called the agency in 2014 to try to find out if a purchase of a stock he wanted to make would violate insider trading laws. He never received a clear answer. Cuban, in the video, applies the instructions of the employee of the SEC but in vain because he will not have an answer to his question thus exposing himself to a possible penalty for insider trading.
The successful entrepreneur, who has invested in many several crypto projects, wants to prove that the SEC keeps its rules vague on purpose. This is what the entire crypto industry blames the regulator for.
For five years, the SEC has been regulating the crypto industry by enforcement actions, targeting startups that raised funds through initial coin offerings. The regulator is, for example, in a showdown with Ripple, a blockchain payment firm based in San Francisco. In a lawsuit, the commission considers that XRP, a token associated with Ripple, should be seen as a security, which the firm rejects.
Another sign of the tensions: the SEC has said in the past that it does not consider Bitcoin and Ether, the first two cryptocurrencies by market cap, as securities, but the current Chairman Gary Gensler still maintains the vagueness on Ether.
Gensler told lawmakers last May that Bitcoin is a "commodity token" but has sidestepped questions on Ether.
