The crypto crackdown is officially underway. Governments around the world have been scrutinizing the crypto industry, especially in the last two years. After taking a laissez-faire approach to the market for a while, the U.S. government is also readying its own crackdown. Now, the U.S. Securities and Exchange Commission (SEC) is investigating crypto exchange Coinbase (NASDAQ:COIN), damaging COIN stock in the process.
As U.S. legislators figure out crypto infrastructure, there has been a lot of philosophical debate going around. Naturally, lawmakers must agree on a lot of strict definitions before they can craft legislation. One of the biggest questions in crypto today is the great “commodity or security” debate.
Crypto projects themselves consider their coins and tokens to be commodities. This is especially true of projects like Ripple (XRP-USD), which is meant to replace traditional banking. However, a great deal of regulators, legislators and investors actually believe cryptos to be securities. Their argument is also convincing when you consider things like decentralized autonomous organization (DAO) tokens; holding DAO tokens gives investors voting power, much like shareholders of traditional stocks.
Solving this debate — or at least devising a way to assign each crypto a label — is crucial for regulation. That’s because it will decide which government entity should regulate which cryptos. The SEC has taken the lead on this, probing multiple projects under the assumption that they are securities. By doing so, the SEC is accelerating the debate, forcing courts to set legal precedents for the industry.
Last week, however, U.S. Representative Brad Sherman gave a message to the SEC: stop going after “small fish” and start probing the big players. Now, the commission appears to be heeding these words.
COIN Stock Rattled by SEC Probe
Outside of the SEC’s lawsuit against Ripple, the commission hasn’t gone after many huge crypto projects. Most of its crypto probes involve smaller DeFi apps and tiny exchanges. That’s the issue Sherman raised to the SEC at a recent financial services meeting. After all, how can these small-time players lead to any notable precedent for future infrastructure? The SEC needs to go after the top dogs. Now, it’s starting to do so with a fresh Coinbase investigation.
Yesterday evening, the SEC announced its investigation of Coinbase, one of the largest crypto exchanges in the U.S. and the only publicly traded crypto exchange stock on Wall Street. With a market capitalization of $15 billion and a trading floor that processes billions of dollars in crypto today, this news makes for the SEC’s biggest probe yet.
As of now, there aren’t many details to the probe. But the news does suggest the SEC is investigating a number of the cryptos listed through Coinbase, calling them unregistered securities offerings. Coinbase argues that it does not list securities on its platform. However, the company also concedes that it doesn’t really know if this is true, blaming a lack of guidance.
It will be interesting to see things play out here. Given the massive scope of the probe, the resulting decision could establish a firm precedent on the “commodity or security” debate.
In the meantime, COIN stock is plummeting. Shares are down 15% on the news. Coinbase is also in the middle of another publicity nightmare; a former product manager has been charged with using his role to conduct insider trading.
On the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
