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The U.S. Securities and Exchange Commission (SEC) has been communicating more frequently with the crypto sector, and centralized exchanges were the first to receive signals of increased regulation.
Just today, according to foreign media reports, the United States has expanded its investigation into the trading platform Binance, and authorities are now examining possible insider trading and market manipulation. This is the latest sign of the country's renewed scrutiny of cryptocurrency exchanges.
In recent months, many countries or regions have sent clear signals to centralized cryptocurrency trading. A quick look shows that the U.S. Securities and Exchange Commission, the Securities and Exchange Commission of Thailand, the Cayman Islands Monetary Authority, the Singapore Financial Regulatory Authority, the Financial Services Agency of Japan, and the Financial Conduct Authority of the United Kingdom have all issued warnings to centralized exchanges to varying degrees, and have even filed relevant charges.
On September 15, Stephen Stonberg, CEO of Bittrex Global, one of the most compliant exchanges in the United States, said that in the face of tightening regulations, Bittrex is exploring a "safe haven," and the safe haven that Bittrex refers to may involve STOs and security token products.
Bittrex also said it is testing a certain number of products it calls “tokenized Google, tokenized Tesla,” which are currently only sold to a small number of customers under a Bermuda digital business license.
Is such a "safe haven" feasible? SEC dilemma, where are the regulatory standards?
Since July this year, many countries and regions have issued warnings to varying degrees to Binance, the largest digital currency exchange.
These actions appear to indicate that exchanges cannot circumvent national laws by operating in other jurisdictions. Investors need to use cryptocurrency exchanges licensed in their country or region to avoid the risk of their assets being frozen or even confiscated.
On the other hand, the United States, which has the most complete existing cryptocurrency regulatory framework, is also closely watching the innovative moves of cryptocurrency exchanges.
Some time ago, the cryptocurrency lending product that Coinbase, a US-listed compliant cryptocurrency exchange, planned to launch was explicitly opposed by the SEC. According to public information from multiple channels, this yet-to-be-launched product allows investors to earn interest from the cryptocurrencies they hold. The SEC believes that this cryptocurrency lending product falls into the category of bonds and issued a Wells notice, expressing its clear opposition.
Note: Wells notice: An informal reminder issued by the SEC to US-listed companies before filing a civil lawsuit. Listed companies that receive the notice can communicate and negotiate with the SEC before receiving a formal lawsuit.
This is also the SEC’s latest statement on cryptocurrency lending products. SEC Chairman Gary Gensler also recently reiterated his attitude that "on-chain lending is a security": cryptocurrency lending and mortgage platforms that hold user funds may fall under the jurisdiction of U.S. securities laws and should be supervised by regulators.
Since products such as lending, mortgages, and swaps are all part of the infrastructure for on-chain product interactions, these actions show that the SEC's actions on the crypto market are faster than expected.
After this, the launch of Coinbase’s lending products may be significantly delayed.
Brian Armstrong, CEO of Coinbase, has publicly stated, “We are committed to complying with the law. But sometimes the law is unclear. Therefore, if the SEC wants to issue guidance, we are happy to follow it. It would be great if the SEC could enforce it equally across the industry.”
Here, the CEO did touch on a rather important issue in crypto regulation: “the law is not clear.”
As early as July 2017, after the "The DAO" hearing incident, the US government proposed that the US Securities and Exchange Commission (SEC) should regulate the token market. In the new field of encryption, the SEC uses the existing US securities law to include tokens that may be suitable for securities regulation into the existing regulatory scope and call them "Securities Tokens", referred to as ST, while some tokens that are not suitable for securities regulation are classified as "Utility Tokens", referred to as UT.
Since then, the existing U.S. crypto regulatory framework has used the Howey test to define ST, but the concept itself is vague. Most digital currencies emphasize their UT attributes, and regulation has been in a gray area for many years.
Since 2019, some digital asset issuers have chosen to register with the SEC before issuing their digital assets to avoid regulatory issues that may arise from the characterization of tokens.
However, the mainstream view in the crypto community insists that crypto assets and securities are not of the same nature.
In such a regulatory environment, the frequency of lawsuits involving the crypto field is not high, and most defendants tend to choose to settle with compensation. For example, this week, the U.S. SEC accused Media Group Inc. and Saraca Media of illegally issuing unregistered digital securities G-Coins or G-Dollars. The lawsuit ended with the defendants paying a unified compensation of US$539 million.
Since the second half of 2020, decentralized financial projects have emerged frequently, and the distributed financial concept brought by DeFi has been rapidly expanding. The innovation speed of the entire crypto market is almost unprecedented. The rapid innovation speed of the cryptocurrency market and the high difficulty of supervision have also made the SEC's substantive progress in crypto regulation slightly slow.
In April this year, the SEC changed its term, and the crypto community had high expectations for the new SEC. At the same time, the rising crypto market seemed to make it more urgent for the SEC to clarify the regulatory process.
One of the most obvious examples is the infrastructure bill proposed by the Biden administration in August. The bill mentioned the definition of "broker" in terms of crypto taxation. Around this concept, the crypto industry and Congress held multiple rounds of dialogue and communication, and had heated discussions on whether the definition involved software developers, crypto miners, node operators, decentralized exchanges, etc. This shows that the US regulators also need time to understand and digest new things.
In this regulatory context, many are calling on the SEC to refine its regulation of cryptocurrencies. Senator Elizabeth Warren recently raised issues such as cryptocurrency exchange outages, high transaction fees, and financial inclusion to the SEC.
The existing regulatory rules may not be enough.
SEC Chairman Gary Gensler has also been speaking out since Tuesday. According to foreign media reports, the chairman has assured the Senate that he is quickly developing a set of rules to oversee the volatile cryptocurrency market while balancing the protection of innovation.
At the same time, some media also leaked information that the SEC is investigating centralized exchanges such as Uniswap. The crypto market may need to focus more on compliance issues. STO: Full of “pain points” under compliance
In terms of compliance, compliant exchanges represented by Bittrex have begun to bring up the issue of STO again.
Is this the next direction for cryptocurrency compliance development?
Since the establishment of the US crypto compliance framework, STO is a digital token compliance issuance system based on the ST definition and US law. However, since this concept was proposed, the entire market has still had a mediocre response to security tokens.
The first problem is that the cost of issuing and listing digital securities in a strict sense is very high. If listed, it will also require continuous listing and trading service fees every year.
In the first half of this year, Openfinance, the first compliant digital securities trading platform in the United States, conveyed to the outside world the dilemma it faced: the low trading volume on the platform was no longer enough to support normal operation and maintenance costs, and the few listed and tradable STs still had to pay listing service fees every year. Subsequently, the platform was acquired by another crypto exchange INX in June.
The trading platform also stated a negative fact: the listing service costs of strictly compliant digital securities that have been traded on the platform have exceeded the revenue that the exchange can bring after its listing.
In other aspects, project parties who choose to issue digital securities are subject to certain restrictions, and the development of ST infrastructure has not met expectations.
At present, there are very few compliant digital securities exchanges (platforms) holding ATS licenses. In addition to Openfinance, tZERO, almost the only leading digital securities trading platform, currently only supports the platform coins issued by the platform itself, and the information about new digital securities listings has not been updated for a long time.
Project parties who chose to issue and list STO also encountered many problems.
In 2019, Props tokens were issued in accordance with RegA+, the strictest provision in the STO system. This is a creator incentive token based on the YouNew streaming platform. It has attracted much attention because it is one of the earliest securities tokens approved by the SEC. However, in August of this year, Props announced that it would cease operations and open source the Props protocol for forking. The official explanation of Props is: "Due to the restrictions of compliant security tokens, the company is unable to carry out product development and has difficulty launching new features such as staking. In addition, no US exchange can currently list crypto assets like Props Token."
This choice may be a helpless move. Problems such as high cost, imperfect facilities, and great difficulty have also made there very few blockchain projects willing to choose STO issuance, and indirectly led to very few currencies available for trading on compliant platforms.
In addition, the liquidity of this market is extremely poor.
In the past, STO issuers had high hopes for this method, hoping to integrate some of the advantages of blockchain and the characteristics of securities and enter the mainstream financial investment market. However, people who are well versed in the blockchain field can see that the registration, filing and final issuance and listing of STO are all subject to strict supervision, which has already sacrificed some of the characteristics of blockchain such as free autonomy, decentralization, privacy and anonymity.
In the STO system, most primary market investors must be qualified investors under the securities law framework, and secondary market traders must also strictly follow the real-name system and KYC. In addition, the underlying layer supporting ST needs to have super powers such as revocable and freezeable to meet regulatory requirements, which makes it difficult to increase the number of investors or investment institutions.
In comparison, for investors, whether considering liquidity, trading volume or the number of tradable currencies, exchanges such as Binance and Coinbase may be a better choice.
At present, the largest institutions in Japan and Europe are the most receptive to STO. The existing digital securities asset categories are mostly real estate, and the number of such digital securities has long accounted for more than 50%. However, in terms of liquidity, market scope, and international influence, there are still some deficiencies.
The registration and issuance costs are much higher than those of ordinary large-scale companies, the trading platform infrastructure is not perfect, and there is insufficient liquidity in the primary and secondary markets. These problems still remain to this day.
In any case, as a new asset class, the crypto market is still looking forward to the trillion-dollar market in the traditional financial system to develop. However, compared with traditional finance, the compliance infrastructure is extremely imperfect. With the SEC's clear attitude, both the crypto field and the traditional financial market may be waiting for the new SEC's rules to bring more positive impacts to this emerging field. |
