Is the SEC’s War on Crypto ‘Regulation by Enforcement’?

SEC Chair Gensler has been publicly saying that he does not view bitcoin as a security, but that he’s got questions about everything else. I would not focus too much on those that we did not include. We typically aren’t going to allege anything as a security until we have conducted a full investigation and concluded that it appears to be an unregistered security.

More importantly, our five-person commission has voted on that. I can think whatever I want and it has zero impact on the world until the commission has decided to authorize action.

All we need to do to establish jurisdiction over Coinbase’s conduct, in our view, is to establish that they have been in the business of transacting in at least one security, unregistered or otherwise.

And if they are transacting in securities and they are performing the functions of a broker of a clearing agency, that they take money from one party and hand it to the other, and take a token from one party and give it to the other, that’s classic clearing agency conduct or acting as an exchange.

Those are all traditional market functions that require separate registration. You have to register as a broker. You have to register as an exchange. You have to register as a clearing agency. There are rules about how much overlap you can have on those functions. And the rules are there to reduce conflicts of interest, to better position investors and to enhance accountability.

And traditionally there has been some degree of competition where if you’re a broker, you’re not going to want to route your client’s transactions to a shady exchange. You need to have confidence that the exchange has legitimate listing requirements and is in compliance with its self-regulatory organization and its larger regulatory obligations and is handling its business in an appropriate way and surveilling for manipulative trading and otherwise keeping a clear book.

And similarly, if you’re an exchange, you’re not going to want to have your transactions cleared by an unreliable clearing agency. People are going to get mad at you. They’re going to come sue you. And when you collapse all those functions under one roof, you no longer have brokers looking out for conflicts of interest at exchanges.

But just to pick an example, one of the coins was Solana. Why sue Coinbase instead of suing the Solana Foundation for issuing Solana in the first place?

This reminds me of the share class issue, where the SEC allows mutual fund companies to issue B and C shares, and then goes after financial advisors who sell them. If you’re going to allow the product to be manufactured, what’s the problem with using it?

What we have alleged against Coinbase, in regard to Solana, is unregistered broker activity, unregistered clearing activity, unregistered exchange activity. We have not alleged that Coinbase violated the law by issuing or offering or selling Solana under Section 5 of the 1933 Securities Act. We have alleged that they are performing exchange functions, and that would be true whether it’s Solana as a security or any of the other tokens or securities.

Ric Edelman is an author and founder of RIA Edelman Financial Engines (earlier Edelman Financial Services). He now leads the Digital Assets Council of Financial Professionals.