In November, the US Securities and Exchange Commission (SEC) filed a lawsuit against crypto exchange Kraken in which it accused it of operating as an unregistered securities exchange.
However, this legal duel seems to be yet another misguided attempt by the securities regulator to exert its control over the crypto industry that presents a fundamental challenge to its regulatory playbook.
The lawsuit
Not only is the lawsuit is a repeat of the past failures of the SEC, but also an obvious example of its regulatory overreach that has not been able to understand the essence of cryptocurrency.
The agency has taken similar action against Coinbase, another crypto exchange, and this highlights a pattern of aggressive regulation, which is counterproductive as well as inefficient.
The SEC has made similar allegations against Coinbase in the lawsuit for operating as an unregistered securities exchange.
The problem with this approach is that it does not comprehend the nature of crypto exchanges because they are not like traditional securities exchanges.
A diverse range of digital assets are offered on platforms like Kraken and they cannot be neatly categorized within the existing regulatory framework for securities.
The fact that the SEC has misclassified these assets shows that it does not have a clear understanding of the unique characteristics of cryptocurrencies.
They are considered decentralized assets that often have currency-like features or utility that distinguish them from conventional securities.
The issues
The fact that technological neutrality is absent is one of the most striking issues. This principle dictates that all forms of technology should be subject to the same regulatory frameworks.
It means that no specific technology should be penalized or favored. However, the SEC is forcing cryptocurrencies into the mold of traditional securities.
This not only shows that it is misapplying laws, but also indicates that the regulatory body has a clear bias against digital assets.
Not only is innovation hindered due to this lack of neutrality, but it also unfairly targets exchanges that are trying to work within the regulatory framework.
The risks
The aggressive stance that the SEC has taken could push businesses to leave the US and move to other jurisdictions that are crypto friendly.
Called regulatory arbitrage, this phenomenon could cause the US to lose its position as a pioneer in technological innovation.
Due to the global nature of the crypto industry, businesses simply change locations when there is excessive regulation in one country and they take their innovations and economic benefits with them.
The lawsuit against Kraken could become yet another example of the failure of the SEC to regulate the crypto industry, similar to the outcome in the Coinbase matter.
This kind of misinformed and aggressive regulation is futile and also damaging to the SEC’s credibility. It implies that the regulator is not truly interested in understanding and adapting to new technologies.
The case is not the only legal battle and highlights a broader issue within the regulatory framework of the US in its approach to cryptocurrencies.
The SEC needs to move beyond its outdated tactics and use a more constructive and informed manner to engage with the crypto industry.