Cryptocurrency exchange Coinbase Global Inc. released a proposal Thursday for comprehensive reform of U.S. federal regulation of digital assets, urging Congress to create a new agency to regulate the industry under a different framework than is used to oversee the legacy financial services industry.
“There should be one federal regulator designated for digital asset markets,” Faryar Shirzad, chief policy officer at Coinbase
told reporters Thursday. “A digitally native and dynamic regulator would help ensure that the transformation of the financial system serves as many members of the American public as possible.”
The crypto industry has long chafed at the the U.S. financial regulatory apparatus, made up of several federal and state agencies, including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Reserve. It has also protested against agencies like the SEC using securities laws to regulate digital assets, which it claims are fundamentally different from traditional assets like stocks and bonds in a way that makes them incompatible with the existing regulatory framework.
Shirzad said that cryptocurrencies and the distributed-ledger technology that undergirds them have the potential to revolutionize the global financial system. The current regulatory framework, he said “assumes the ongoing existence of a series of financial intermediaries” like clearinghouses and brokers that could be made obsolete by blockchain technology.
Coinbase’s proposal posits that this new financial regulator would primarily be responsible for registering and supervising marketplaces for digital assets, or MDAs, to ensure against fraud and manipulation and to mandate that issuers of digital assets disclose relevant information to market participants. The new regulator would also oversee so-called initial coin offerings, which are often used to raise money for new ventures, similar to how public companies raise money by issuing stock.
The SEC has in recent years taken a hard line against some issuers of digital assets, arguing that when tokens are sold to the public to fund a profit-making enterprises, those instruments are securities and subject to the registration and disclosure requirements under U.S. laws that date back to the 1930s.
Todd Phillips, director of financial regulation and corporate governance at the left-leaning think tank Center for American Progress told MarketWatch that Coinbase’s proposal doesn’t acknowledge that digital assets can serve a wide range of purposes and need to be regulated based on their function rather their digital form.
“They treat digital assets as one giant asset class, and they aren’t. Some of these instruments are securities, some are commodities and some are other things,” Phillips said. “This proposal, if implemented, would enable many, if not all, public companies to stop issuing stock, start issuing coins and avoid the securities laws.”
SEC Commissioner Caroline Crenshaw expressed similar concerns when she argued against creating a regulatory safe harbor for crypto assets that advocates argue would enable the industry to innovate, free from burdensome oversight.
“Granting a special exemption to these projects would provide unfair advantages to blockchain related businesses and disadvantage everyone else: participants who raise capital in compliant ways that support healthy markets and informed investors,” Crenshaw said during a speech at the Practising Law Institute Wednesday.
The SEC has indicated that it doesn’t consider bitcoin
— the two most valuable cryptocurrencies by market capitalization — to be securities, but it has brought actions against issuers of other tokens and crypto exchanges for not registering with the agency. The industry has complained that the SEC has not provided clear guidelines describing what features define a digital token as a security.
“I commend Coinbase for developing their thoughtful framework for regulating digital assets,” Michael Piwowar, former Acting SEC Chairman and executive director of the Milken Institute Center for Financial Markets said in a statement. “Regulatory certainty in the United States is urgently needed to maintain our leadership in responsible financial innovation.”
Coinbase CEO Brian Armstrong began a public feud with the SEC last month after the regulator threatened to sue the company if it went forward with it’s planned “Lend” product, which would enable coinbase users to earn interest on cryptocurrency deposited with the firm. Securities law experts said that because Coinbase is not a regulated bank, an offering like Lend would be considered a debt instrument and therefore a security.