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SEC Exploits ‘Lack of Regulatory Clarity’ in Cryptocurrency Crackdown
The US SEC has continued its crackdown on the cryptocurrency sector this year, but the agency’s current leverage may also represent its biggest weakness in the months ahead.
In addition to ongoing litigation against companies like Coinbase and RippleGary Gensler and the US SEC issued Wells warnings against Uniswap, Consensys and Robin Hood for alleged violations. The lawsuit concerns the broad cryptocurrency services offered by the three companies, but one specific area revolves around the second largest blockchain asset, Ethereum (ET).
“Given the regulator’s general position of considering most cryptocurrencies as securities, platforms like Uniswap, despite its decentralized nature, may be scrutinized for managing public trading activities. This, in turn, pushes the authority regulators to consider registration and supervision to ensure compliance with securities regulations.”
Adam Berker, Mercury Senior Legal Advisor
Much confusion exists regarding the commission’s classification of Ethereum and its native currency, Ether. The chairman of the SEC regularly supported that cryptocurrencies fall under federal law, citing the Howey Test as proof.
This claim was rejected in court during the agency’s long battle with XRP Ripple issuer. However, a technological shift could prove detrimental to Ethereum’s potential commodity status.
“The SEC has already lost the credibility of the Howey Test during the Ripple lawsuit. By precedence, it may lose its attack against Uniswap and Ethereum. However, Ethereum’s move from Proof-of-Work to Proof-of-Stake will likely be the main differentiating point the SEC may present, since the Ripple lawsuit has not established any precedence on the matter.”
Rudy De La Cruz, VC based General and Strategic Partner
Hope for cryptocurrencies against the SEC
Over the years, cryptocurrency advocates and industry stakeholders have criticized Gensler and the Wall Street watchdog for taking a “regulation through enforcement” approach to cryptocurrency oversight.
Giants like it Coinbase they even sued the commission, filing regulatory challenges in federal court. While the absence of a U.S. regulatory framework for digital assets has likely allowed Gensler’s agency to file litigation en masse, that could change if Congress intervenes.
“The Security and Exchange Commission has the upper hand as the regulator, and further worsening the situation for the cryptocurrency market is the lack of regulatory clarity in the United States. However, several bills have been introduced to put an end to this problem”.
Rudy De La Cruz, VC general and strategic partner
Two bipartisan pieces of legislation have been introduced in 2022 that could move cryptocurrency oversight away from Gensler’s commission. With the Digital Commodities Consumer Protection Act (DCCPA), the Commodity Futures Trading Commission (CFTC) would assume regulatory authority over digital assets.
If passed, the DCCPA would provide relief to Ethereum, especially since CFTC Chairman Rostin Behnam has publicly stated that Bitcoin (Bitcoin) and Ether are commodities.
The Responsible Financial Innovation Act (RFIA) could also provide much-needed clarity to agencies that oversee digital assets. Additionally, De La Cruz believed that the Digital Trading Clarity Act and the Financial Innovation and Technology for the 21st Century Act of 2023 could help close regulatory gaps.
“If and when these laws go into effect, the cryptocurrency market will have a good chance of defending itself from SEC attacks.”
Rudy De La Cruz, VC general and strategic partner