Coinbase calls for new crypto regulation and framework

Costumed characters pass the Nasdaq MarketSite during the Coinbase IPO, in New York's Times Square, Wednesday, April 14, 2021. Wall Street will be focused on Coinbase Wednesday with the digital currency exchange becoming a publicly traded company. (AP Photo/Richard Drew)

Coinbase is advocating for significant reforms to the way the cryptocurrency industry governed. On Thursday, the business issued a digital asset proposal in which Chief Policy Officer Faryar Shirzad. Advocated for regulating cryptocurrencies and other digital assets by a single federal body under a different legal framework. Additionally, the plan establishes distinct disclosure standards for specific digital assets, such as stablecoins.

The suggestion comes a month after Coinbase Armstrong expressed his opposition to restrict the company’s loan product on Twitter. Given Coinbase’s size as one of the major cryptocurrency exchanges globally. The company’s choice not to proceed with its lending product. Hinted that other companies may follow suit and collaborate with the SEC. The company’s decision to issue this policy proposal demonstrates other plans in mind. But nothing as dramatic as leaving the United States.

Armstrong reiterated his reservations about the SEC in a Wall Street Journal editorial post on Thursday.

“I’ve communicated my dissatisfaction with recent regulatory moves. I fear that entrepreneurs and enterprises lack visibility into the expectations of authorities. Regulators frequently do not apply their opinions consistently or fairly,” Armstrong stated. He continues by providing a high-level overview of what the proposal comprises.

Coinbase’s central claim is that the crypto sector define by the “blockchain-driven and decentralized evolution of the internet” and the “formation of a different asset class that is digitally native and enables novel economic use cases.”

The proposal contends that these two developments – blockchain technology and digital assets – do not fit into the existing financial system since it was not developed with them in mind and is “predicated” on financial intermediaries.

“A new framework for regulating digital assets would ensure that innovation is not inhibit by the difficulties associated with migrating from our old market structure,” Shirzad wrote in the ideas post on Coinbase’s blog.

NOT ANOTHER FEDERAL REGULATORY ORGANIZATION

This letter contradicts SEC Chairman Gary Gensler’s repeated statements on the subject throughout his congressional testimony over the last two months.

“We do not require another regulator,” Gensler testified before the United States House of Financial Services on Oct. 5. “Even if Congress does not act, there are steps that can be taken to assure the seamless operation of the two agencies.”

Along with a new regulatory framework for the cryptocurrency industry, Coinbase advocates for a single US regulator. To collaborate with a dedicated self-regulatory organization (SRO) – the private sector’s equivalent – to develop new regulations and manage the field.

“This two-tier regulatory structure will ensure effective and streamlined regulation and oversight, while adapting existing frameworks to the needs of our new digitally driven financial sector,” Shirzad stated.

Additionally, the plan proposes a new disclosure regime that categorizes digital assets. According to their decentralized governance, public awareness, project maturity, and utilization in the cryptocurrency sector. This section of the proposal echoes arguments made by Congress and industry professionals. Digital assets are difficult to distinguish under the Howey Test. The SEC’s most frequently cited test for determining whether a digital asset is a security and thus subject to disclosure and registration requirements.

Investor Protection and a Level Playing Field

“I believe the securities rules are fairly clear; if you raise money from another source and the investing public believes… anticipates, or has a reasonable expectation of profits based on the efforts of others, that falls under the scope of the securities legislation,” Gensler testified before the House.

“It refers to the Clarity for Digital Tokens Act, modeled after Pierce’s proposal to provide a safe harbor period. Additionally, it contends that while stable coins are similar to typical money-market funds. They should not be subject to additional disclosure requirements based on their intended function, “which is essentially different from money market funds.”

Finally, the Coinbase plan advocates for interoperability and fair competition to ensure that investors have equitable access without regulatory constraints that favor large participants.

“No single organization, even Coinbase, should act as the industry’s gatekeeper,” Armstrong said in his op-ed.

While it’s evident that Washington will have divergent views on Coinbase’s plan. The document serves as validation of the market’s current size and value. In August, the crypto industry expressed concern about language in the Biden administration’s infrastructure bill. It defined a “broker” in the context of cryptocurrency trades. Similarly, the Coinbase plan may be the start of a much longer conflict between regulators and the crypto sector over future development.

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