The SEC Chair, Gary Gensler
The crypto rebound is alive and kicking.
Over the past week, the price of bitcoin soared 4.2%, currently trading at $23,800, and the ethereum price jumped 7.9% to just over $1,700. Most altcoins are following the majors’s suit. XRP
In the meantime, the Securities and Exchange Commission (SEC) has shaken up the crypto community with yet another bombshell. On July 21, the SEC filed insider trading charges against an ex-product manager at Coinbase and his two relatives.
“Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets, at least nine of which were securities, and then typically sold them shortly after the announcements for a profit. The long-running insider trading scheme generated illicit profits totaling more than $1.1 million,” the SEC’s press release stated.
An SEC probe into the U.S.’s largest crypto exchange is profound on its own. (Coinbase stock crashed ~20% on the news.) But the sheer semantics of the investigation carries a much bigger takeaway: for the first time, the SEC has officially declared a cryptocurrency as a security.
Zooming out
If you’ve been reading my newsletter, this shouldn’t come as much of a shocker to you.
As I reported, last month the Senate introduced the most comprehensive crypto legislation to date aiming to overhaul how crypto is regulated. Among other things, the bill wants to classify digital assets into two buckets—commodities and securities—and put them under the regulatory purview of the SEC or the Commodity Futures Trading Commission (CFTC).
“The Responsible Financial Innovation Act seeks to classify digital assets into securities and commodities and regulate them accordingly. This will “give digital asset companies the ability to determine what their regulatory obligations will be and give regulators the clarity they need to enforce existing securities and commodities trading laws.” For example, bitcoin and ether, which fall into the “commodity” bucket, would be regulated by the Commodity Futures Trading Commission (CFTC), ” I wrote back then.
The SEC’s charges against Coinbase are an initial sign that regulators are in favor of the view that non-autonomous cryptos—which raise money from the public with a promise of capital gains—are no different than stocks and have to comply with the same laws.
Looking ahead
So, who’s who?
Judging by lawmaker rhetoric, the strongest contestants to persevere as commodities are bitcoin and ether—the most widespread autonomous cryptos. In fact, in a recent interview, the SEC’s Chair, Gary Gensler, singled out bitcoin as the only cryptocurrency, he and his “predecessors” think deserves a commodity status.
“Some like bitcoin, and that’s the only one I’m gonna say… my predecessors and others have said, they’re a commodity,” he said.
That’s important because being an “official” commodity status kicks open the floodgates of institutional capital. As Michael Saylor, CEO of MicroStrategy
The rest of the cryptocurrencies, in the SEC chair’s opinion, belong in the securities bucket. In his recent address, Gensler argued that most cryptos fit the “investment contract” definition under the Howey Test, which technically subjects them to the Security Exchange Acts of 1933 and 1934.
Would a security label hurt cryptos? At the end of the day, it’s probably more of a double-edged sword.
On one hand, it would burden both exchanges and cryptos with strict compliance and bring many smaller players to their knees. On the other, crypto “standardization” could open the doors to millions of retail investors through traditional investment vehicles like ETFs.
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