While 2022 was undoubtedly a tumultuous year for the cryptocurrency industry, it was simply a preview of what’s to come in this corner of the fintech space as regulatory bodies and crypto players continue entering the courts en masse over regulatory confusion, allegations of fraud, and increased enforcement. And now, the industry landscape is about to get shaken up once again. On April 24, Coinbase filed a lawsuit against the Securities and Exchange Commission after the regulator failed to respond to the company’s July petition requesting that the agency begin making rules for the crypto industry.
The petition prompted the Commission to “propose and adopt rules to govern the regulation of securities that are offered and traded via digitally native methods, including potential rules to identify which digital assets are securities.” Currently, the digital assets market in the United States does not have a clear regulatory framework to guide the industry’s players on best practices. This lack of guidance is creating an influx of increased pressure from regulators on crypto platforms and putting strain on the U.S. crypto sector during a time when many of the space’s major players are considering taking their operations overseas to more favorable regulatory environments.
As the legal landscape in the crypto industry continues to evolve, we are left to wonder: will Coinbase get its day in court? And will the SEC (or another regulator) make 2023 the year they tame crypto’s wild west?
The SEC and Coinbase’s Ongoing Conflict
This isn’t the beginning of these two entities’ legal battle, and it likely won’t be ending any time soon. This court challenge comes on the heels of the SEC’s March Well’s Notice to Coinbase; the notice, which is one of the final steps before the agency formally files charges, warned the crypto purveyor that they were potentially violating U.S. securities law. And in mid- 2022, the SEC also began a probe into Coinbase’s operations, examining whether the company’s digital asset trading was legitimate.
Despite receiving ongoing scrutiny from regulators, Coinbase has maintained that its regulatory-focused operations are compliant and has had no problem working with agencies to resolve conflicts calmly. But other platforms haven’t been as poised; the SEC has been bearing down on companies that they see as “noncompliant”, but other lawmakers argue that the enforcement is unsustainable as it is punishing firms for not adhering to a law that they didn’t even know applied to them.
Earlier this month, Gensler told members of the House Financial Services Committee, “We have a clear regulatory framework built up over 90 years. The exchanges are just a bunch of intermediaries in this market that think they have a choice. They don’t have a choice. They’re noncompliant generally, and they need to come into compliance”. As statements from lawmakers like Gensler continue to downplay the confusion of the regulatory environment, Coinbase is pushing for the SEC to fulfill its official duties of at least responding to their original complaint.
The Legal Implications
Coinbase and other cryptocurrency platforms are projected to continue lobbying for regulators to finally lay down the necessary framework to support the U.S.’s digital assets market before it’s too late. Those in the industry spent more than $25 million last year on lobbying, but that number may drop if lawmakers don’t take real action and stop “regulating by enforcement” through suits like those against Bittrex and FTX. We have already seen some platforms and exchanges like Gemini and even Coinbase talk about creating overseas arms of their businesses, with some considering moving operations out of the US entirely on account of unclear regulations.
In this volatile and uncertain environment, it is important to ensure that your company is adhering to the current framework as closely as possible while also preparing for potential new guidance. To stay ahead of the curve when it comes to cryptocurrency regulation and litigation, those involved in the space should actively engage with subject matter experts. By bringing on a diverse team of experts who can help address the risks and opportunities in the industry, crypto-related companies can avoid prosecution or sufficiently prepare for litigation. Therefore, counsel should consider a team consisting of the following:
- Cryptocurrency experts on exchanges and virtual currencies like stablecoins
- Trading software engineers on crypto trading platform development and management
- Crypto trading specialists on crypto trading desk operations
- Former crypto issuers on the development and issuance of ICOs (Initial Coin Offerings)
- Crypto ethics experts on the ethical practices surrounding the use and trading of cryptocurrencies
- Former senior investment industry insiders on industry best practices
Need help navigating the evolving cryptocurrency market? WIT has teams of fintech experts prepared to address incoming disputes in the space. Our expert teams were created to address what we expect to be the key areas of litigation in emerging financial technologies, digital assets, and cryptocurrencies and exchanges.