Coinbase sees single regulator, new framework for crypto supervision

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Coinbase wants the U.S. to create a new regulator to oversee the digital asset market, the company said in a policy document published Thursday.

Putting crypto oversight in the hands of one digitally native regulator would help the U.S. and the industry “avoid fragmented and inconsistent” supervision of the digital asset market’s “unique and concurrent innovations,” Coinbase said.

As it stands now, the crypto sphere sees regulation from several bodies. Coinbase, for example, paid $6.5 million in March to resolve a Commodity Futures Trading Commission (CFTC) investigation into its trading volumes, then last month halted the launch of a lending product — called  Lend — after the Securities and Exchange Commission (SEC) allegedly threatened to sue the company.

State regulators, too, have had a hand in policing the space. New Jersey, Texas and other states this summer ordered the crypto firm BlockFi to stop offering interest-bearing accounts to residents because the regulators say the products aren’t registered as securities.

“We started where a lot of people start, which is taking the existing multiplicity of regulators and trying to figure out what minimal surgery you could do to make things work,” Faryar Shirzad, Coinbase’s chief policy officer — and the author of Thursday’s document — told CNBC. “And then there was a point at which … we just kind of looked at each other [and] we said it takes more effort to try to adapt the current system which is predicated on an old market structure — more intellectual effort, I would say — than it does starting from scratch.”

The U.S.’s patchwork regulatory regime, as it applies to crypto, puts it at risk of lagging other countries in digital asset supervision, Shirzad said.

“The United States is at risk of becoming a ‘taker’ of regulation as opposed to the primary ‘shaper’ of modern financial services,” Shirzad told CNBC.

Old laws, new tech

Apart from supervision by a single regulator, Coinbase suggested establishing a self-regulatory organization “to strengthen the oversight regime and provide more granular oversight.”

In announcing it was tabling Lend, Coinbase last month cited a desire for “regulatory clarity for the crypto industry as a whole.” Thursday’s policy document frames the company’s vision of that clarity.

At least some of Coinbase’s frustration stems from the SEC’s insistence that precedent, as it exists, is clear — something the company disputes. 

“The SEC told us they consider Lend to involve a security but wouldn’t say why or how they’d reached that conclusion,” Coinbase’s chief legal officer, Paul Grewal, wrote in a blog post Sept. 7.

The SEC contends interest-bearing accounts like those that would exist through Lend constitute investment contracts under the Howey test, a standard established through a 1946 Supreme Court case. In that case, investors bought rows of orange trees in Florida and agreed to let the Howey Company manage the trees, harvest and sell the fruit, and give investors a share of the proceeds. By that measure, a Bloomberg op-ed writer said in July, the oranges, trees and land are not securities, but the agreement is.

Grewal, however, argued that Coinbase’s crypto holders wouldn’t be investing but lending.

Coinbase’s policy statement takes direct aim at the SEC’s logic of adapting old laws to new technology. 

“Laws drafted in the 1930s to facilitate effective oversight of our financial system could not contemplate this technological revolution,” the company wrote Thursday. “Forcing the full spectrum of digital assets into supervisory categories codified before the use of computers risks stifling the development of this transformational technology, thus pushing offshore the innovative center of gravity that currently sits in the United States.”

Cryptocurrency, Shirzad said at a press briefing Thursday, “does not fit neatly within the existing financial system.”

For that reason, the company suggested a second prong to its vision: It sees digital assets regulated under a separate framework apart from traditional finance.

“It didn’t make sense to take a legacy regulation and somehow transform it into an agency that would be able to look at these markets anew,” Shirzad said.

Coinbase CEO Brian Armstrong backed up that thinking in an op-ed published Thursday in The Wall Street Journal

“Our existing financial regulatory system doesn’t work effectively for the open, decentralized networks that crypto has created,” Armstrong wrote. “Regulation was built around a series of financial intermediaries — transfer agents, clearing houses and traditional brokers — which don’t play a part in crypto transactions.”

Empowering the space

Apart from its regulatory suggestion, Coinbase said it wants to crypto space to support interoperability and fair competition, and to empower crypto holders through enhanced transparency and protection against fraud and market manipulation.

The document, Armstrong wrote in his op-ed, is “meant to spark a conversation about regulating crypto — one that isn’t anchored in specific products or enforcement actions, but instead takes a high-level view of the changing financial system and the new technology that underpins it.”

Coinbase is hardly the only crypto firm to sketch out its vision of a regulatory future — Andreessen Horowitz and others have done likewise. Some have come in response to a request from Sen. Pat Toomey, R-PA, who is beginning to craft crypto legislation, Bloomberg reported.

In the balance hangs a crypto asset market that has ballooned from $16 billion five years ago to $2.3 trillion today, according to CNBC.

“We understand that high-level proposals don’t become law overnight — nor should they,” Shirzad wrote. “But what they can do is evolve the debate in ways that are helpful for everyone, including members of Congress who are increasingly focusing on this area.”

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