The differences between the treatment received by major crypto companies in the U.S. versus Asia could not be more telling.
While the U.S. regulator is choosing to crack down on crypto, it’s also paving the way for Asia to dominate the future of finance.
Regulation by enforcement
“Instead of publishing a clear rule book, the SEC has taken a regulation-by-enforcement approach that is harming America,” said Brian Armstrong, the founder and CEO of Coinbase.
Last week, the SEC decided to sue both Coinbase and Binance.US, alleging that both firms were operating as unregistered broker-dealers. The latter didn’t come as much of a surprise — Binance had been under the scrutiny of the U.S. regulator for quite some time, but the Coinbase suit has made it abundantly clear that the SEC is going to war against crypto.
Coinbase went public on the NYSE in April 2021 and as part of its listing, the SEC reviewed its business and allowed it to become a public company. At the same time, the SEC and Commodity Futures Trading Commission have made conflicting statements and can’t seem to agree on what is a security and what is a commodity. Furthermore, the U.S. Congress has not yet introduced legislation that would provide regulatory clarity for the crypto industry.
The SEC had previously issued a Wells Notice against Coinbase, which recommended that the SEC take enforcement action against them. But what’s surprising about all of this is that the SEC had historically campaigned for crypto businesses to “come in and register.” And Coinbase, as a leader in the U.S. digital assets space, has been known for its strict regulatory compliance. Yet the SEC’s interactions with Coinbase have been uncooperative at best. Coinbase CEO, Brian Armstrong, has shared that the exchange repeatedly tried to come in and register with the SEC but with no path forward.
Of the alleged securities violations against Coinbase, the list of assets deemed to be securities reveals the broad nature of its classification. The SEC’s claims that its self-custodied wallet is a broker-dealer because it helps “route” a transaction doesn’t hold much merit either. And alleging that Coinbase is behaving like a clearing agency also seems far-fetched.
These actions are likely to attract fines for Coinbase and possibly the closure of its staking business. But there is a distinct difference between this and the SEC’s legal action against Binance, which faces an outright ban from operating in the U.S. The silver lining to this is that Coinbase now has the opportunity to fight the SEC in court — and fight it will. Armstrong has already said he’ll do what it takes to “get the job done.” The outcome of this case will likely determine the future of crypto in America.
War on innovation
Regardless of whether you believe that some tokens are securities or not, perhaps it’s time to realize that U.S. securities laws are outdated, and we need to update its legal system.
The SEC’s current approach to crypto regulation risks stifling progress and innovation, and this goes against historical precedents of supporting revolutionary technologies in other industries. If the U.S. wants to lose out on financial technology innovation, it’s going the right way about it.
These cases are going to be a defining moment in history. And whatever the outcome, history will not remember the SEC favorably. It’s clear that blockchain technology offers significant advantages to global financial systems.
Attempting to resist this industry is futile, given its inherent resistance to censorship. We’ve seen this in China’s unsuccessful crackdown on cryptocurrencies. Now, they’re using Hong Kong as a testing ground to maintain some semblance of control.
Embrace the industry, and build a framework for compliance
At the end of the day, if regulators want to ban crypto, what are they going to do, turn off the internet? They won’t and can’t do that. So, the only option is to embrace it.
It would have been more effective for the SEC to build a clear regulatory framework within which compliant operators could function. Simplifying the process for rule followers is the only way to safeguard consumers. Bad actors will operate regardless, but if legal operations become untenable, good actors will either be forced to shut down or relocate offshore, out of regulators’ reach.
Protecting consumers effectively involves creating an environment where control over firms’ actions is possible — a space for experimentation, innovation and trustworthy interaction under a regulated framework.
The events of this week have put the integrity of the SEC under question. Is this really about consumer protection? Or is it about regulatory capture? Many industry participants appear to think it’s likely the latter.
Rarely, if ever, does regulation lead innovation. Imagine if the Wright brothers had been subject to Federal Aviation Administration oversight — the advent of commercial aviation might have been severely delayed if not entirely derailed.
The future of finance is being built in Asia
Contrasting sharply with the U.S., Asia is rapidly becoming the preferred home base for cryptocurrency companies. Several key players, including Circle and Anchorage Digital, have already set up operations in Singapore.
At the same time, Hong Kong is positioning itself as a significant hub for crypto as it rolls out legislation promoting cryptocurrency investment and blockchain technology adoption in the financial sector. Earlier this year, the Hong Kong Monetary Authority encouraged banks to offer services to cryptocurrency companies. Following this, they legalized crypto trading for retail investors. Now, the Hong Kong Securities and Futures Commission is advocating for conventional financial institutions to delve into tokenizing real-world assets, a concept that U.S. money manager, Franklin Templeton, is keenly exploring.
Boston Consulting Group estimates that the tokenization of traditional financial assets could be worth as much as US$16 trillion by 2030. If the SEC persists in its current stance, this could be a monumental loss for the U.S. economy.
Despite the U.S. being the go-to destination for ambitious start-ups, there’s a reason why start-ups are increasingly choosing locations outside of the U.S. as their base. It’s likely more and more U.S. crypto companies will move offshore with a safe bet that almost all major crypto players are already in the process of establishing hubs in Hong Kong and Singapore.