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Coinbase is calling for vast changes in how the crypto sector is regulated. On Thursday the company released a digital asset proposal in which its Chief Policy Officer Faryar Shirzad called for cryptocurrencies and other digital assets to be regulated under a separate legal framework by a single federal agency. Furthermore, the proposal calls for separate disclosure requirements on particular digital assets such as stablecoins.
The proposal comes a month after Coinbase (COIN) CEO Brian Armstrong voiced objections on Twitter in response to the SEC's decision to block its lending product. Given Coinbase's size as one of the world's largest crypto exchanges, the decision not to move forward with its lending product suggested other companies might follow suit in working with the SEC. Issuing this policy proposal shows the company has other plans in mind but nothing yet as drastic as leaving the U.S.
On Thursday Armstrong revisited the qualms he expressed in his September tweet about the SEC with an opinion piece in the Wall Street Journal.
"I’ve expressed some frustration with recent actions by regulators. My concern is that entrepreneurs and businesses have little visibility into what regulators expect of us. The positions regulators take often aren’t applied in ways that seem consistent or equitable," wrote Armstrong. He goes on to reflect the high-level summary of what the proposal entails.
The root argument of Coinbase's proposal is that the crypto sector is defined by the "blockchain-driven and decentralized evolution of the internet" and "the emergence of a distinctive asset class that is digitally native and empowers unique economic use cases."
These two innovations – blockchain technology and digital assets – don't fit into the existing financial system because it wasn't designed with them in mind and is "predicated" by financial intermediaries, which those innovations disrupt, the proposal argues.
"A new framework for how we regulate digital assets will ensure that innovation can occur in ways that are not hampered by the difficulty of transitioning from our legacy market structure," wrote Coinbase's Shirzad in the proposals post on the company's blog.
Not another federal regulating agency
The message runs contrary to what SEC Chair Gary Gensler has repeatedly said about the topic during his congressional testimonies over the last two months.
”We don’t need another regulator,” Gensler said on Oct. 5 before the U.S. House of Financial Services. “There are things that can be done to ensure the smoothness between the two agencies … even if Congress doesn’t act.”
In addition to a new regulatory framework for the crypto sector, Coinbase is calling for a single U.S. regulator to work in partnership with a dedicated self-regulatory organization (SRO) – a private sector equivalent – to come up with new rules and regulate the space.
"This two-tier regulatory structure will ensure efficient and streamlined regulation and oversight, and evolve elements of the existing frameworks to meet the requirements of our new technologically-driven financial system," Shirzad wrote.
Investor protection and fair competition
The proposal also calls for a new disclosure regimen which separates various digital assets based on their decentralized governance, public awareness, project maturity and use in the crypto sector. This part of the proposal echoes arguments made by members of Congress and people working in the crypto sector that digital assets aren't easily distinguished by the Howey Test, the SEC's most frequently cited tool for determining whether a digital asset is a security and thus subject to disclosure and registration requirements.
“I think the securities laws are quite clear, if you are raising money from somebody else and the investing public believes … anticipates, or has a reasonable anticipation of profits based on the efforts of others, that fits within the securities law," Gensler said in his House testimony.
It points to the Clarity for Digital Tokens Act, which is based on SEC Commissioner Hester Pierce's proposal to give new token projects a safe harbor period. Furthermore, it argues that while stablecoins resemble traditional money-market funds, they should not require different disclosures based on how they are being used, "which is inherently different from money market funds."
Finally, the Coinbase proposal calls for interoperability and fair competition to give investors equal access without inhibiting regulatory rules, which would give advantages to large participants.
"No single company, including Coinbase, should be a gatekeeper for this industry," Armstrong wrote in his op-ed.
While it's clear Washington will have different opinions on Coinbase's proposal, the document is a confirmation of the size and value that the crypto markets now hold. In August the crypto industry expressed concern over the language used in the Biden administration's infrastructure bill centering around the definition of a "broker" in the context of cryptocurrency trades; similarly, the Coinbase proposal could be the beginning of a much longer battle between regulators and the crypto sector over how the industry should develop in the future.
David Hollerith is a senior reporter covering the cryptocurrency and stock markets. You can follow him @DsHollers.