Coinbase
Global and other crypto firms have struggled for years to convince Congress to change the way the industry is regulated, and a recent court case may finally get lawmakers moving.
As soon as next week, the House Financial Services Committee plans to consider two crypto bills—one that would regulate trading platforms such as Coinbase (ticker: COIN) and another that would set guardrails around so-called stablecoins, a kind of digital token whose value is most often pegged to the dollar.
Committee chairman Rep. Patrick McHenry (R., N.C.) has made crypto a priority, but Democrats have been skeptical of the approach of the bills—or the need for any legislation at all.
Securities and Exchange Commission Chair Gary Gensler has said his agency can rein in crypto firms by enforcing existing laws, but a federal district judge threw a wrench into that approach last week in a closely watched court case between the SEC and Ripple Labs, the company behind the XRP token.
The SEC had said XRP tokens are securities and that Ripple failed to register with the agency, while Ripple argued the tokens didn’t meet that standard. The judge ruled XRP wasn’t, in and of itself, a security and suggested that most secondary market transactions fell outside securities laws.
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Barring a reversal, that could make it much more difficult for the SEC to pursue enforcement actions against other token issuers or against platforms including Coinbase. The SEC had sued Coinbase and competitor Binance in June alleging, among other things, the trading platforms were illegally operating unregistered securities exchanges, a charge the firms deny.
After the Ripple decision, which seemed to hurt the SEC’s litigation position, shares of Coinbase surged about 20%. In the past month, Coinbase stock has risen more than 83% to $104.59.
While the contents of both bills are in flux, previous drafts of the stablecoin bill had required issuers to maintain reserves backing the tokens in low-risk assets and to submit to regular examinations by accounting firms. The second bill, on crypto market structure, would limit the SEC’s power over crypto exchanges by classifying many tokens as commodities.
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Crypto firms and Republicans are using the Ripple win to push Democrats to get on board with passing legislation. Part of the idea is that if courts constrain the SEC’s jurisdiction, without a bill consumers won’t have an agency to ensure they are protected from industry abuse.
“The Ripple case has made a huge impact on the politics of the bills,” said Ron Hammond, director of government relations at the Blockchain Association trade group, in a tweet on Tuesday.
Coinbase CEO Brian Armstrong is meeting with lawmakers on Wednesday to explain the trading platform’s position and push for legislation that Coinbase argues would provide for the regulatory clarity needed to grow the industry in the U.S., according to a person familiar with the matter.
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Despite the push from Republicans and crypto firms, both bills remain a long shot. While they will have little trouble passing Republican-controlled House committees, thus far the bills haven’t garnered enough support from Democrats to pass the Senate.
Some left-leaning advocacy groups have also attacked the trading platform bill.
A letter to House committees last week signed by the Americans for Financial Reform, Center for American Progress, and others, said the bill would weaken consumer and investor protections for traditional and crypto investors.
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“It would also broadly reshape financial regulatory agencies’ jurisdictions and weaken regulatory oversight of financial products and services writ large,” the letter stated.
Some lawmakers also view the Ripple win as an outlier.
“The problem is that last week’s Ripple decision, which partly went against the SEC, is the only substantive court ruling in this space,” wrote TD Cowen policy analyst Jaret Seiberg in a research note this week. “We believe more courts need to clarify the law before either side questions its view of the SEC’s authority.”
For now, a win in court appears to be a much easier lift for crypto firms than a win in Congress.
Write to Joe Light at joe.light@barrons.com
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