Widespread reports that the US Securities and Exchange Commission (SEC) is investigating $20 billion crypto exchange Coinbase are just the tip of the iceberg, according to a staffer from US Senator Cynthia Lummi’s (R-WY) office. Employees say every U.S. exchange — and the largest crypto exchange in the world, Binance — is in various stages of being investigated. There are more than 40 US cryptocurrency exchanges, according to crypto data website CoinGecko. The SEC did not respond to multiple requests for comment.
Comes in the wake of a series of SEC actions asserting the regulator’s domain over the crypto industry, and an equally strong response from the US Commodity Futures Trading Commission (CFTC) pushing back against what it characterizes as “regulation through enforcement,” staff say. The SEC wants to urgently resolve its dispute with the CFTC over crypto jurisdiction. If the matter isn’t resolved internally, he says lawmakers will have to get involved, and Congress is likely to side with the CFTC.
In 2014, long before ethereum and pretty much every cryptocurrency other than bitcoin and its early copycats existed, the CFTC asserted its jurisdiction over what it then called “virtual currencies.” Then, in 2018, a federal court gave the CFTC jurisdiction to prosecute fraud cases involving virtual currency, according to a CFTC statement. Similarly, the SEC has repeatedly argued that bitcoin is a commodity. And in June 2018, SEC Director William Hinman said in a speech that he did not believe ethereum was a security, suggesting that it may rightly be under the CFTC’s jurisdiction.
Evidence that the situation may be changing began to emerge in June when SEC Chairman Gary Gensler hinted that ethereum was a security when he said bitcoin was the only crypto-asset he was comfortable calling a commodity. It’s worth noting that while ethereum was not included in the list of nine assets the SEC said were collateral in its insider trading charges against the former Coinbase employee, his brother and his friend, the SEC specifically mentioned that each of the assets was created on the ethereum blockchain .
The source described perhaps the talks between the SEC and the CFTC as not particularly fruitful, arguing that the final decision on who gets what authority is likely to fall in the hands of lawmakers.
Yesterday, US Senators Debbie Stabenow (D-MI), Chair of the Senate Agriculture, Nutrition and Forestry Committee, and Ranking Member John Boozman (R-AR) introduced the Digital Commodities Consumer Protection Act of 2022 to give the CFTC new powers to regulate digital goods. Senator Lummis himself co-sponsored with Senator Kirsten Gillibrand (D-NY), the Responsible Financial Innovation Act, a bipartisan digital asset regulation bill that is even more sweeping in scope.
Ironically, Senator Lummis’ staff gives both bills a less than 50% chance of passing this year. The only way either bill would pass this year is if a catastrophic black swan event, like a major U.S. stock market collapsing, can rally lawmakers, he says. The most likely crypto bill to see before the year is over is the recently delayed stablecoin bill detailing how banks could be allowed to issue their own stablecoins, which the source says could be attached to the appropriations bill by the end of the year.
A senior executive at a major cryptocurrency exchange also said on the background that based on chatter he’s hearing from members of the SEC, many US cryptocurrency exchanges have likely received Wells Notices, which are used to formally inform companies when a case is about to be filed against them, and that most are under investigation. Binance.US delisted one of its assets listed by the SEC earlier this week.
The executive said these cases are separate from the standard procedure the SEC regularly conducts — for example — to ask exchanges if they have had communications with the team that created a newly listed asset, are in contact with anyone raising money for the newly listed asset, or if the team ever came up with representations about how the token might achieve value.
The executive goes on to say that the SEC has not historically asked about forks of bitcoin such as litecoin, but based on recent comments to the House Appropriations Committee that bitcoin “may” be a commodity that could soon change.