SEC leveraging “lack of regulatory clarity” in crypto crackdown

The US SEC has continued its crypto crackdown this year, but the agency’s current leverage could also be its biggest weakness in the coming months.

In addition to ongoing lawsuits against firms like Coinbase and Ripple, Gary Gensler and the US SEC have issued Wells notices against Uniswap, Consensys, and Robinhood for alleged violations. The lawsuit’s intent relates to the broad range of cryptocurrency services offered by the three firms, but a particular focus revolves around Ethereum (ETH), the second-largest blockchain asset.

“Given the regulator’s general stance of viewing most cryptocurrencies as securities, platforms such as Uniswap, despite its decentralized nature, may be examined for managing public trading activities. “This prompts the regulator to consider registration and oversight to ensure compliance with securities regulations.”

Adam Berker, Mercuryo Senior Legal Counsel

There is a lot of confusion over the commission’s classification of Ethereum and its own currency, Ether. The SEC Chairman has regularly argued that cryptocurrencies fall under federal law, citing the Howey Test as evidence.

This decision was overturned in court during the agency’s long battle with XRP issuer Ripple. Still, a technological change could harm Ethereum’s potential commodity status.

“The SEC has already lost credibility of the Howey Test during the Ripple case. It may lose its offensive primarily against Uniswap and Ethereum. However, Ethereum’s transition from proof-of-work to proof-of-stake would be the biggest differentiating argument the SEC could make, as the Ripple case does not set a precedent for this.”

Rudy De La Cruz basedVC General and Strategic Partner Hope for crypto against SEC

Over the years, crypto advocates and industry stakeholders have criticized Gensler and the Wall Street watchdog for taking a “regulation through enforcement” approach to crypto oversight.

Giants such as Coinbase sued the commission and filed rulemaking petitions in federal court. While the lack of a U.S. digital asset framework has allowed Gensler’s agency to file a class-action lawsuit, things could change if Congress takes action.

“The Security and Exchange Commission has the upper hand as a regulatory authority, and what further exacerbates the situation of the crypto market is the lack of regulatory clarity in the United States. However, many legislative proposals have been presented to put an end to this situation.”

Rudy De La Cruz, basedVC General and Strategic Partner

In 2022, two bipartisan bills were introduced that could move crypto oversight away from Gensler’s commission. With the Digital Commodity Consumer Protection Act (DCCPA), the Commodity Futures Trading Commission (CFTC) will assume regulatory authority over digital assets.

If passed, the DCCPA would provide relief for Ethereum, especially since CFTC Chairman Rostin Behnam publicly claimed that Bitcoin (BTC) and Ether are commodities.

The Responsible Financial Innovation Act (RFIA) could also provide much-needed clarity for institutions that oversee digital assets. Additionally, starting in 2023, the Digital Trade Clarity Act and the Financial Innovation and Technology for the 21st Century Act could help fill regulatory gaps, De La Cruz noted.

“If these laws go into effect, the crypto market will have a fair chance to defend itself against attacks from the SEC.”

Rudy De La Cruz, basedVC General and Strategic Partner