Shares of Coinbase Global plunged on Wednesday after the US Securities and Exchange Commission (SEC) warned that it would sue the company if it continues to implement a plan to allow users to earn interest by lending crypto assets.
In addition to hitting Coinbase's plans (ticker: COIN), the move by the SEC signals a new phase in its enforcement action. The agency is currently asking the question: Are some of the fastest growing segments of the crypto industry legitimate?
In particular, the SEC and other regulators seem to be concerned about crypto companies offering high interest rates to people who lend out their assets - a service traditionally performed by banks.
Webull CEO Anthony Denier said: "The SEC has been flirting with crypto regulations for some time, but today's news of Coinbase receiving a Wells notice from the SEC feels very much like the first salvo of a long and drawn out conflict that may engulf the whole space."
If the SEC deals with cryptocurrencies on a case-by-case basis, it would make it difficult for companies to launch products whose legality is unclear. Two SEC commissioners, Hester Pierce and Elad Roisman, warned that this approach is "not the best way to move forward."
Crypto companies used to be smart about working with regulators, but this last step could create problems for the industry. Crypto is not controlled by just one regulator, but if one should oversee it, the Commodity Futures Trading Commission (CFTC) may be more accommodating than the SEC. Former CFTC Chairman Christopher Giancarlo was even called "crypto dad" before.
But now, SEC Chairman Gary Gensler has pointed to a less liberal approach and said the agency may have the authority to regulate areas such as decentralized finance (DeFi), where crypto holders lend their tokens to a pool and often earn interest. The SEC is reportedly investigating Uniswap Labs, the company that started the DeFi exchange.
Last week, Gensler noted that the SEC has already taken action against 75 or 80 cryptocurrencies, and when asked why the SEC does not set rules for the 1,500 or so other coins currently being traded, Gensler said each case is different.
"Every case has facts and circumstances, every case has to be very carefully put together, and so forth," he said. "Our laws are clear. And yet, it still takes time, month after month to put them together."
In response, Coinbase CEO Brian Armstrong tweeted: "So if the SEC wants to publish guidance, we are also happy to follow that. But in this case they are refusing to offer any opinion in writing to the industry on what should be allowed and why, and instead are engaging in intimidation tactics behind closed doors. Whatever their theory is here, it feels like a reach/land grab vs other regulators."
SEC spokesman answered: "The SEC does not comment on the existence or nonexistence of a possible investigation."
In any case, BTIG Managing Director Mark Palmer remains upbeat on Coinbase, with a target price of $ 500 for the stock. In his post, he wrote that Coinbase might be the best company for this fight because it has more resources than most crypto companies and has a history of compliance in other areas.
But despite Palmer's assertion, it is unclear whether Gensler really wants to introduce "regulation by litigation." It might just be unclear who has the power over cryptocurrency activities because so many agencies have some of that. So, writing rules for the industry won't happen quickly without more obvious authority. But the faster this happens, the better it is for the cryptocurrency. Gensler said he was working on a structure and would need help from Congress.
"And I'll be engaging with Congress, along with the Commodity Futures Trading Commission, along with the Department of the Treasury, the opposite controlling currency, the Federal Reserve," Gensler said. "We all have a piece of this. It's not just the market side. It's also the lending side, the monetary policy side and the money laundering side."