Coinbase Global Inc. (“Coinbase”) is facing an SEC probe into whether it improperly allowed trading of digital assets that should have been registered as securities. Although there have been several court rulings and position statements by the SEC regarding digital assets, it has not halted the trading on crypto exchanges. While the SEC scrutiny of Coinbase has increased since the platform expanded the number of tokens, in which it offers trading, no meaningful regulatory action has occurred with respect to Coinbase.

The drumbeat in Washington for US regulators to do more to oversee crypto has grown louder as digital currencies have tumbled from all-time highs, erasing hundreds of billions of dollars in market value. SEC Chair Gary Gensler has homed in on trading platforms and argued that the SEC should do more to protect “retail investors”.

To determine if a digital asset is a security, the SEC applies a legal test from the 1946 U.S. Supreme Court decision. Generally, the SEC considers monies under its purview if the funding is made with the intention of profiting from the efforts of the issuer. The SEC Commissioner has suggested publically that “many” cryptocurrencies come under the definition. The SEC has not indicated which “coins” are “securities”, and instead has allowed exchanges to decide for themselves.

In the absence of clear guidance this regulatory approach, seems like a game of “gotcha”. Crypto is a young industry and it deserves clear and accurate rules so that its participants can navigate the path forward. The SEC should either test its approach in court, and perhaps it is with Coinbase, or stand down. Ultimately, the U.S. Supreme Court will likely decide the question of how to determine whether crypto coins or tokens are securities. Either way, crypto can thrive if its coins generate enough investor interest, but the rules for regulation and investor protection should be made clear at this point.

Tags: cryptocurrency, Digital Assets, Joseph Pastore, SEC