The US crypto regulation landscape and ongoing issues between exchanges and the SEC are examined, highlighting the concerns raised by Kraken’s chief legal officer and the role of the SEC in financial and security market regulation.
The chief legal officer of Kraken stated in an interview a few days ago that the US crypto regulation structure is untenable. Numerous US crypto exchanges, or international ones operating in the US, have been having issues with the SEC in particular for a number of months. Almost all cryptocurrency exchanges are being accused by the SEC of permitting the trading of unregistered securities. The SEC is the regional agency in charge of regulating the financial markets, notably the security markets.
Not enough clarity
The issue is that there is still a lack of legal clarity, notably in the United States, making it difficult to determine how existing laws should be applied to the burgeoning crypto markets as there is no dedicated legislation protecting digital assets.
With the Markets in Crypto-Assets Regulation (MiCAR), the issue has already been resolved in the EU.
As a result, there are those who have attempted to provide regulatory clarity around the world and those who have not yet been able to provide crypto operators with a specific and clear legislative framework on which they can operate safely.
To be honest, the European Union hasn’t yet answered the issue that the SEC has brought up, either. However, the SEC has brought up the matter by accusing exchanges, although no financial market regulatory agency in the EU has done so to date.
However, the SEC does not have the authority to unilaterally determine whether something should be classified as a security or not; if it did, it would already have done so. The legal system, i.e., the courts, have the final say on the matter and should, in theory, decide on each cryptocurrency separately. A clear and unambiguous statement on the subject from Congress, maybe in the form of an ad hoc statute, would be much simpler and clearer.
Position of Kraken on cryptocurrency rules
One of the biggest US cryptocurrency exchanges is Kraken, particularly following the closure of FTX. It is a historic exchange since it has existed since 2011 and has consistently held views that are extremely similar to the libertarian ideals that gave rise to Bitcoin.
Marco Santori, CLO of Kraken, discussed the condition of cryptocurrency regulation in the US and the issues it is causing exchanges. This might be considered the company’s perspective.
After taking part as a witness at the House of Representatives committee specifically focused on the future of digital assets, he said as much in an interview with Forbes.
Santori, whose expertise on these matters dates back to 2014, is a true authority.
First, he made it clear that something needed to be done because the “situation in the US is untenable” in regards to crypto operations.
He agrees to emphasize the significance of consumer protection, but he also wants to make sure that innovation in the US continues.
Instead, it appears that US exchanges are attempting to leave the nation; for instance, the biggest US cryptocurrency exchange just launched a new foreign edition with a base in Bermuda.
For Santori, the main issue right now is really the conflict over jurisdiction between the SEC and the CFTC. The SEC is attempting to increase its power in this area by asserting that cryptocurrencies are securities, whereas the CFTC (Commodity Futures Trading Commission) believes that the majority of cryptocurrencies would be considered commodities.
The criteria for exchange registration
The SEC’s real objective appears to be to force all cryptocurrency exchanges to register with its registry in order to get the power to oversee them.
It is important to note that in order to permit the purchase and sale of securities, both the securities themselves and the trading platforms must be approved by and registered with the SEC.
Contrarily, no specific authorisation is needed to permit the trading of commodities; as a result, up until this point, the US exchanges have been able to function without a registration requirement. To be true, some jurisdictions already have stricter laws, but Coinbase and Kraken are creative California-based businesses, where the rules are less restrictive and more lax.
Even Ethereum’s nature is now being questioned, despite the fact that it is universally accepted that Bitcoin is a commodity. This may be done in an effort to force cryptocurrency exchanges to register.
It’s likely that hundreds or even thousands of cryptocurrencies fall under the category of unregistered securities, but with Ethereum, it’s more than reasonable to have reservations. Gary Gensler, the chairman of the SEC, once thought of it as a commodity but has since changed his mind.
The CFTC
Kraken’s CLO contends that since the CFTC does not view the cryptocurrencies listed on the exchange as securities, it would be preferable for it to obtain regulatory dominance over the crypto industry.
The Forbes interviewer notes that before listing any token, Kraken, like many other exchanges, performs a study, and that analysis would suggest that the tokens posted on the market are not securities.
The reality is that, given the current state of affairs, only the judiciary—which has not done so thus far—can render a firm decision on the issue. In fact, the SEC has been suing Ripple for more than two years, alleging that it sold XRP as an unregistered security. The court has not yet made a decision in this case.
Additionally, Santori stated that the SEC’s claim that it would be simple to register with them is “baffling,” while the CFTC does not require registration.
He made note of the fact that completing a standard S-1 form, which businesses submit to the SEC as part of their application, can actually cost millions of dollars. A crypto project should, for instance, include information on the quantity and distribution of nodes, the number of developers, commits on Github, and so forth.
In addition to Kraken, new US crypto laws
The US Congress has been trying to regulate the cryptocurrency market specifically for a while, but they haven’t been able to figure it out yet.
The decision that two subcommittees must concur on the proposed law’s language before it can advance and be submitted to the Senate was made at the same hearing that Santori attended.
To put it another way, it appears that such a bill is currently bogged in the usual palace squabbles, possibly as a result of the politicians who must decide on it having only a rudimentary understanding of the issue.
In fact, they could learn from the European MiCAR to speed up the process, but they seem to favor a different strategy.
Whether the US’s policy direction is more inclined to favor consumer protection, as has been the case in the EU, or innovation, as is happening, for instance, in the United Arab Emirates (UAE), is maybe not yet adequately obvious.
The US maintains and consolidates its dominant position in the crypto industry, whilst the EU does not. Countries like the UAE and Switzerland are a challenge to that role globally, and it’s possible that this is the reason why US policy is unsure of itself.
On the one hand, it presumably wishes it could tighten rules governing crypto markets, as it did in the EU, but on the other hand, it is concerned that doing so may hand the industry’s leadership to other nations. The fact that the cryptocurrency exchanges are currently stuck in the middle gives them various problems.
