Crypto Gears Up for Regulatory War While Congress Preps Bill

There is currently a “war” underway between U.S. policymakers and the cryptocurrency industry.

That’s according to Blockchain Association CEO Kristin Smith, who said at a conference Friday (April 28) that “we are fighting … we’re going to probably be at war for the next 18 to 20 months.”

Meanwhile, House Financial Services Committee Chairman Patrick McHenry of North Carolina said a sector framework bill will pass Congress in the next two months. Additionally, U.S. crypto stalwart Coinbase responded in kind to allegations and warnings about the legality of its business model from the Securities and Exchange Commission (SEC) with a new court filing and public statement.

As reported by PYMNTS, the House Financial Services Committee and House Agriculture Committee, both of which oversee subcommittees responsible for digital assets, are this month holding a joint subcommittee to craft a workable piece of legislation meant to regulate the crypto industry.

“What we plan to do over the next two months is report a deal out,” McHenry said.

U.S. lawmakers have so far failed to get a comprehensive policy framework relating to crypto and digital assets passed. Several draft bills made progress last year before ultimately stalling out.

The co-author of one of the more promising pieces of legislation, Sen. Cynthia Lummis of Wyoming, said last week that a new and improved version of her “Responsible Financial Innovation Act” will be unveiled over the next two months.

“You will see a stronger cybercrime aspect to our bill,” Lummis said, adding that with the European Union’s passage of Markets in Crypto Assets (MiCA), the U.S. is “falling way behind.”

Coinbase Draws Its Battle Lines

U.S.-based crypto exchange Coinbase has decided not to take the recent heat it has been getting from the SEC.

The crypto firm said it would fight the SEC over many of the agency’s claims that Coinbase’s operations run afoul of existing securities laws and regulations, as well as attempt in court to prove that the SEC lacks the authority to oversee cryptocurrency markets.

The SEC’s lawsuit “at this stage, when there is not a clear rulebook, is not constructive, and it’s not good for America,” Coinbase CEO Brian Armstrong said in the statement.

Armstrong added that Coinbase is the “same company” that it was when the SEC allowed it to become public two years ago.

Sullivan and Cromwell (S&C), Coinbase’s lawyers, wrote in an April court memorandum formally responding to the SEC’s Wells Notice: “Each of the staff’s purported legal theories — to the extent they can be discerned — is unsupported by law, untested in court and likely to result in unintended consequences for the commission, investors and markets far beyond the digital asset industry.”

Adding that the agency’s actions reflected “an apparent approach of determining on the fly what the law requires,” the S&C memorandum emphasized that “Coinbase has never wanted to litigate with the commission. The commission should not want to litigate either.”

The company outlined its legal strategy in the memo, underscoring that in court, “the commission will not be able to rely on conclusory or broad assertions about what is a security under SEC v. W.J. Howey, Co., 328 U.S. 293 (1946).”

SEC Chair Gary Gensler’s repeated assertion that “the vast majority” of crypto tokens are securities has been a constant thorn in the side of the sector.

“[F]or each digital asset listed on Coinbase that [the SEC] contends is a security, the commission would have to prove that the asset is being sold as part of an investment contract when traded in the secondary market on Coinbase,” Coinbase lawyers wrote.

Despite its assertations in public, the SEC has been engaged in years of protracted litigation attempting to define Ripple’s XRP token as a security. XRP represents just one single crypto asset among thousands.

So far, the SEC has only indicated that bitcoin, which accounts for around 29% of Coinbase’s transaction revenues per the exchange’s financial filings, should not be viewed or registered as a security.

If the SEC has its way, Coinbase could be forced to register parts of its business with regulators or delist many crypto tokens that regulators say are securities and therefore must comply with investor-protection rules.

Coinbase, which will report its latest earnings Thursday (May 4), has posted four consecutive quarterly losses as lower prices for crypto have hurt its revenue and caused trading volumes to decline.

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