It has been reported that Coinbase has approached the US Securities and Exchange Commission (SEC) regarding registration in order to be a licensed brokerage firm and electronic-trading venue. This move comes after much discussion about supervision and regulation of the booming cryptocurrency industry.
Coinbase, based in San Francisco, is currently one of world’s largest cryptocurrency trading platforms. The Washington Post reported that the company has met with SEC officials to inquire about registering the company with the agency. Registration with the SEC would mean that Coinbase could expand its offering of digital currencies, or tokens, which many have argued should be classified as securities. If this does happen, it would increase the pressure on other trading platforms to follow suit and submit to US oversight and regulations.
Speaking on CNBC last Thursday, Coinbase President Asiff Hirji said, “The assets that we do list have all had some amount of regulatory certainty. As soon as there is more regulatory clarity than there currently is you would expect us to start listing more assets.” A spokesperson for Coinbase declined to comment for the Wall Street Journal piece, which also quotes Richard Levin, of Polsinelli PC, as saying, “It’s an early phase where the industry leaders understand they have to live within a highly regulated environment. They have to deal with the SEC.”
While there has been much debate about how to classify cryptocurrencies, and what qualifications they must meet to be considered a security, there is currently little oversight by US regulators of the trading platforms and the currencies themselves. The companies operating the exchanges and platforms for cryptocurrencies have long been seen as disrupting traditional means of raising capital for ventures and exchange trading, which is still largely unregulated.
2017 saw the rise of Initial Coin Offerings (ICOs), and has added new opportunities for traders but has also made it harder for exchanges to avoid regulation. SEC Chairman Jay Clayton has said in the past that many of the tokens issued through ICOs are securities, meaning that in order to be traded legally, they must be traded on a licensed exchange or electronic platform.
According to the Wall Street Journal article, Token Report reported that $4 billion in capital was raised through ICOs during the first quarter of 2018, which is nearly half of the total raised through the same means in 2017. It is clear, however, that US regulatory agencies such as the SEC are doing their due diligence prior to issuing guidelines for regulation. The SEC has issued multiple requests for information or subpoenas to companies that have been involved with ICOs in order to assess the status of the tokens and to see how certain deals may have evaded securities laws or which tokens might not actually be classified as securities.
Coinbase announced in March that it planned to add additional coins in the future, although it did not indicate what kinds of assets it may eventually add to its platform. The looming specter of SEC and regulatory enforcement action has caused Coinbase and other firms to pause and not continue adding additional tokens to their exchanges. However, Coinbase has added the functionality of storing customer assets on their platform, which is a service usually provided by licensed brokerage firms.
If Coinbase does open their exchange up to SEC regulation, they might just be opening pandora’s box, as the SEC would then be able to assess compliance with the significant array of regulations that brokerage firms face, including the SEC looking through trading records, software security systems, and overview of policies guarding against insider trading and intentional manipulation of the market, an allegation which Coinbase faced last year.
Templum LLC has also registered with the SEC and is classified as a brokerage firm. They operate their licensed brokerage firm and a trading system, and plan to offer companies a platform for selling and trading regulated tokens. The company has asked that they be allowed to “remediate” the status of tokens that were issued and traded illegally by making required regulatory compliance filings with the SEC. In addition, US-based Gemini is also currently regulated in New York.
At the end of the day, Coinbase may want to be careful what it wishes for…