A storm is brewing between the burgeoning crypto industry and regulators tasked with overseeing a hot industry, where potential risks to investors are proliferating almost as fast as new products.
Tuesday’s testimony in the Senate by the newly appointed Securities and Exchange Commission Chairman Gary Gensler did little to shed light on a number of cryptocurrency-related controversies, including an evolving battle with Coinbase (COIN), the leading cryptocurrency trading platform attempting to offer a new loan product.
However, the SEC chief was faced with pointed questions about how far the agency was willing to go to impose order in the Wild West of commerce and product creation in a digital currency sector that prides itself on decentralization, efficiency and empowerment of small investors.
For his part, Gensler said that “this asset class is plagued by fraud, scams and abuse in certain applications. We can do better.” That point was illustrated on Monday, when a fraudulent press release touting a partnership between Walmart (WMT) and Litecoin (LTC-USD) moved the market before the retail giant took it down.
The SEC is created to promote investor protection, facilitate capital formation, and anything else in between, according to Gensler. In recent months, the SEC has gone on the offensive to go after alleged bad actors in the crypto space.
On Monday, the agency accused three media companies of offering illegal stocks and digital assets. In early September, fined crypto lending platform BitConnect and its CEO $ 2 billion for fraud. And the month before, the SEC charged Poloniex, a crypto exchange, $ 10 million for operating an unregistered exchange that sold digital securities.
Regulators “are aggressively targeting cryptocurrency companies using enforcement cases and sending a signal that they are watching the sector very carefully,” Reena Aggarwal, director of the Georgetown Center for Financial Policies and Markets, told Yahoo Finance.
Coinbase and ‘litigation regulation’
However, tensions between regulators and industry players are mounting, as illustrated by a viral Twitter post from Coinbase CEO Brian Armstrong last week. The friction that is brewing between Armstrong and the SEC centers on Coinbase’s plans to launch a crypto loan product, Coinbase Lend, later this year.
With a proposal offering a 4% Annual Percentage Yield (APY) on USD Currency (USDC), a stablecoin pegged to the US dollar, the credit product is lower than other crypto lending businesses according to what Armstrong revealed on Twitter. . However, the SEC still classified the product as a security.
The Coinbase boss isn’t the only one who disagrees with regulators. Other crypto market players have publicly expressed frustration with the SEC, which is also reportedly investigating the popular decentralized finance (DeFi) platform UniSwap.
“This is how the SEC regulates,” Caitlin Long, a Wall Street veteran who is currently CEO of crypto bank startup Avanti Financial, told Yahoo Finance in an interview.
“They will try to move an entire market by choosing an example. What is interesting and frustrating for us in the [crypto] The industry is that the industry has collectively been asking the SEC for clarity on some of these same issues for years, “he added.
They don’t provide much proactive guidance, instead leaving it to the founders to read the tea leaves based on the compliances … But the compliances are spotty and scattered.Nic Carter, crypto investor
Long and others have criticized this approach, calling it “regulation by litigation.” Georgetown’s Aggarwal and those on Capitol Hill have noted that it’s unclear whether the SEC has the authority or resources to regulate other parts of the market, such as fees associated with crypto exchanges.
“In terms of financing, we could use a lot more people,” Gensler admitted Tuesday. “There are 6,000 projects. Some of them are commodities, many of them are securities under the law and many of the platforms are.”
While it remains difficult to pin down the SEC’s next moves in the crypto sector, the biggest concern voiced by advocates and politicians in Washington who disagree with Gensler is that the commission’s current approach lacks clarity.
Jennifer Schulp, a former FINRA attorney and current Director of Financial Regulation Studies at the Cato Institute, said a key issue Gensler showed this week is that determining whether a digital asset is a security is far from clear.
Gensler’s “assertion of authority is based on many assumptions about the facts and circumstances of a myriad of assets,” Schulp told Yahoo Finance.
“This lack of clarity, coupled with the SEC’s insistence on bringing these assets within an inadequate securities regulation framework, runs the risk of hampering innovation at the expense of so-called investor protection,” he added.
Nic Carter, a partner at crypto-focused venture capital firm Castle Island Partners, said that the SEC’s current regulatory framework for crypto assets is completely fair, but that there is much more to be desired.
“They don’t provide a lot of proactive guidance, instead they let the founders read the tea leaves based on compliance … But the compliance is spotty and scattered,” Carter explained.
Other companies with a crypto loan business, such as crypto wealth management firm Abra, avoid regulatory scrutiny by using a “bank trust-based model to deliver performance in crypto custody,” CEO Bill Barhydt told Yahoo Finance. in an interview this week.
This more secure approach includes Know Your Customer (KYC) protocols through a Nevada-based licensed trust company called Prime Trust.
“All users go through the onboarding of those trust accounts through the Abra app. Interest (yield) on cryptocurrency holdings, including Bitcoin, Ethereum and USD stablecoins is paid through Prime Trust,” he said a spokesperson for Abra.
Prime Trust is a chartered trust company regulated by the bank commissioner’s office in the Division of Financial Institutions. Its clients also include crypto exchanges such as Kraken and Binance.US.
Abra faced her own brush with SEC More than a year ago, when the regulator fined the company $ 300,000 for offering clients tokens that reflected the performance of stocks and shares of exchange-traded funds (ETFs). Big exchanges like FTX have managed to offer tokenized shares by not making them available to US investors.
Now with $ 1 billion in assets under management, Abra appears to have recovered from success in its private customer services business that has expanded dramatically in the past six months, according to Barhydt.
“Typically these are wealthy customers looking for a very tactile experience,” he added.
At the close of its latest funding round, Abra raised $ 55 million with the backing of venture investors, including Blockchain Capital and Amex Ventures.
David Hollerith covers cryptocurrencies for Yahoo Finance. FOLLOW @dshollers.
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