Is CryptoFinance calling for drastic changes in how crypto sector is regulated? On Thursday the company released a digital asset proposal in which its Chief Policy Officer Faryar Shirzad called for cryptocurrencies and other digital assets to be regulated by a single federal agency under a separate legal framework. The proposal also calls for specific disclosure requirements on separate digital assets, such as stablecoins.
The proposal comes a month after Coinbase COIN CEO Brian Armstrong voiced objections on Twitter in response to the SEC's decision to block its product. Given Coinbase's size as one of the world's largest crypto exchanges, the decision not to continue with its lending product suggested other companies might follow suit in working with the SEC. Issuing this policy proposal shows the company has other plans in mind but nothing yet as drastic as leaving the U.S.
On Thursday Armstrong revisited the qualms he expressed in his September tweet about the SEC with an opinion piece in the Wall Street Journal.
I ve expressed some frustration over recent actions of regulators. My concern is that small businesses have little visibility into what regulators expect of us? The positions regulators take often aren t applied in ways that seem consistent or equitable, wrote Armstrong. He goes on to reflect the high-level summary of what the proposal entails.
The root argument of Coinbase's proposal is that crypto industry is defined by the decentralized and decentralized evolution of the internet and the emergence of a unique asset class that is digitally native and empowers blockchain-driven use cases. These two innovations blockchain technology and digital assets don't fit into the current financial system because it wasn't designed with them in mind and is predicated by financial intermediaries, which those innovations disrupt, the proposal argues.
A new framework for how we regulate digital assets will ensure that innovation can occur in ways that are not hampered by the difficulty of transitioning from legacy market structure, wrote Coinbase's Shirzad on the company blog.
The message runs contrary to what Congressman Gary Gensler has repeatedly said about the topic during his SEC testimonies over the last two months.
We don't need another regulator, Gensler said on Oct. 5 before the U.S. House of Financial Services. There are things which can be done to ensure the smoothness between the two agencies even if Congress doesn t act. In addition to a new regulatory framework for the crypto sector, Coinbase is calling for a private sector regulator to work in partnership with a single sponsor organization SRO of a dedicated self-regulatory organization to come up with new rules and regulate the space.
Dedicated to efficiency and streamlined regulation and oversight, this two-tier regulatory structure will evolve elements of the existing frameworks to meet the requirements of our new financial system, Shirzad wrote.
The proposal also calls for a decentralized disclosure regimen which separates various digital assets based on their decentralized governance, public awareness, project maturity and use in the crypto sector. This part of the proposal echoes arguments made by members of Congress and people working in the crypto sector that digital assets aren't easily classified by the Howey Test, the SEC's most commonly cited tool for determining whether a digital asset is a security and thus subject to disclosure and registration requirements.
I think the securities laws are quite clear. If you are raising money from somebody else and Gensler believes the investing public anticipates, or has a reasonable anticipation of profits based on efforts by others, that fits into the securities law, Gensler said in his House testimony
It points to the Clarity for Digital Tokens Act, which is based on SEC Commissioner Hester Pierce's proposal to give new token projects a safe harbor period. The company further proposes that while stablecoins resemble traditional money market funds, they should not require different disclosures based on how they are used, which is inherently different from money market funds. Finally, the Coinbase proposal calls for interoperability and fair competition to give investors equal access without inhibiting regulatory rules, which would give advantages to large participants.
No single company, including Coinbase, should be a gatekeeper for this industry, wrote Armstrong in his Opinion & Analysis op-ed.
Is Washington DMV taking decisions to make Coinbase's proposal different? In August the Crypto industry expressed concern over the language used in the Biden administration's infrastructure bill centered around the definition of broker in the context of cryptocurrency trades; similarly, the Coinbase proposal could be the beginning of a much longer battle between regulators and the crypto sector over how the industry should develop in the future.
David Hollerith is a senior reporter covering the stock market and cryptocurrency.