Coinbase (NASDAQ: COIN) CEO, Brian Armstrong, recently participated in the All-In podcast, where he talked about some of the issues with cryptocurrency regulation, that cryptocurrency should not be viewed as a single entity, and his ways of going forward with crypto regulators. There’s a lack of clarity in the cryptocurrency industry. Since Brian Armstrong is one of the top minds in the space, the Biden Administration may consider what he says. That being said, let’s take a look at the XRP lawsuit and what Coinbase CEO has to say about crypto regulations and the Howey Test.
Is A Lack of Regulatory Clarity Good For Cryptocurrency & Blockchain Companies?
In the context of the recent Securities and Exchange Commission policies regarding cryptocurrency, Armstrong noted it’s better when there’s a lack of clarity.
When there’s a lack of clarity, in comparison to potentially damaging regulatory clarity, growth can slow in the industry.
Armstrong pointed to the SEC vs. Ripple lawsuit, and mentioned the SEC considering all cryptocurrencies and digital assets as securities is wrong.
Now, when it comes to policies — Armstrong mentioned how treating every cryptocurrency under the same regulations would not make sense. Some cryptocurrencies, such as Bitcoin and Ethereum, might be a commodity, but some might be a security. Stablecoins may be a currency.
For example, he went on to say that commodities, securities, and currencies must each have a separate set of regulations and regulatory bodies. Commodities are overseen by the Commodities Futures Trading Commission (CFTC), securities by the Securities and Exchange Commission (SEC), and currencies by the Treasury. If these don’t cover cryptocurrencies, then those won’t be regulated either.
The SEC has, in the past, repeatedly questioned the nature of cryptocurrencies. Among other instances, Hester Pierce’s dissent, statements made by Gary Gensler on the regulation of cryptocurrencies, and the ongoing Ripple lawsuit, prove the SEC’s sentiment towards the cryptocurrency landscape.
The Howey Test & Cryptocurrency Regulations
Extolling the need for more thorough policies around cryptocurrencies, Armstrong noted.
In today’s market, most startups will hire pricey lawyers to carefully separate these old, old rules that were enacted in the 1930s, according to Armstrong.
To add to that, he further touched upon the issue of how a new test needs to be built keeping in mind the Howey Test. He points out the need to include a set of definitions that clearly outline the boundaries between securities, currencies, commodities, and more. The Coinbase CEO further laid out his plans to work with other cryptocurrency organizations and regulatory bodies to come up with a new framework in the future.
If you don’t already know, there’s an ongoing lawsuit between Ripple Labs & the SEC.
In December 2020, the SEC sued XRP for being classified as a security because it is currently being used to finance Ripple’s payment system. Furthermore, Ripple’s executives are personally benefiting from the selling of XRP.
Regulations under the SEC dictates that securities need to be registered with the commission and certain financial information must be publicly disclosed. The purpose is to avoid fraud and safeguard the interests of investors.
The Howey Test & The XRP Lawsuit
The SEC deems whether or not an asset is a security based on the Supreme Court’s 1946 decision on SEC v. W.J. Howey Co. Essentially, the decision states that if people are paying for something with the expectation of making profits in return, then it is a security.
For the SEC to allege in their lawsuit that XRP falls under the purview of the Howey test, they would need to make it XRP according to the definition of that test.
The SEC claims that Ripple’s XRP is a security, but points out that Ripple’s platform is not decentralized.
Ripple has accused the SEC of classifying them unfairly. They think their operation is not materially different from other companies that have been given permission.
These are pivotal times for crypto regulations, and the staff at Legal Favor will continue to provide updates as they arise.