Coinbase takes heat from SEC over listing tokens that could be securities

The Securities & Exchange Commission (SEC) chairman, Gary Gensler, appeared before the Senate Banking Committee to provide testimony on the regulator’s work. One of the major topics discussed was the cryptocurrency market. 

Coinbase under fire as SEC battle continues

Gensler’s prepared remarks highlighted the need to regulate cryptocurrency exchanges more closely. Appearing before the Senate Banking Committee, he further suggested that cryptocurrency projects and exchanges should have a discussion with the agency. 

The SEC chair believes that dozens to hundreds of tokens on crypto exchanges could be securities, unlike Bitcoin, the leading digital asset regulators believe is a commodity.

Senator Elizabeth Warren (D-Ma) added that last week’s flash crash seen in the crypto markets and volatility demonstrates the need to regulate digital asset exchanges. She explained that while cryptocurrencies have claimed to be a solution to financial inclusion, she criticized those claims. 

Further referring to last week’s price plunge, she highlighted that $400 billion in market value just disappeared. In a scenario where an investor wishes to withdraw money amid the volatility, major crypto exchanges, including Coinbase, face temporary connectivity issues.

Singling out Coinbase, Gensler responded to Warren, adding that the exchange did not have to register as a securities exchange even though dozens of coins listed could be securities.

The statement from the SEC boss that Coinbase could be selling securities without a registered license with the agency comes just after a week that the exchange was sued by the agency for its lending product.

The securities regulator stated that Coinbase’s planned Lend program, which allows users to earn interest on crypto assets on the platform, could be involving securities but failed to give an explanation.

While Bitcoin and Ethereum have been pointed out not to fall under securities regulation, it appears that the agency considers that many other tokens fall into a grey area. The SEC has yet to clarify which coins could be deemed as securities and provide a transparent process for identifying a token’s legal status. 

Senator Pat Toomey (R-Pa) responded in frustration during the hearing, responding to Gensler’s statement stating that he is concerned about how the SEC has not provided a sufficient definition on how it would apply the Howey Test, a test used to identify whether an investment is a security. 

Toomey further pointed out that stablecoins would not fit the definition of a security since stablecoins do not provide a “likely expectation of a profit,” as stated in the Howest test.

While Coinbase has not made a comment on Gensler’s remarks, the exchange has previously delisted XRP in light of the SEC’s legal battle against Ripple Labs.