Can SEC’s Tough Stand on Coinbase Trigger A Crypto Market Sell-off?

A fresh brawl has emerged recently between the regulators and the crypto industry, and this time securities regulator U.S. SEC is planning to sue public-listed crypto firm Coinbase (NASDAQ: COIN). The SEC is planning for an enforcement regulation on Coinbase’s crypto lending business.

On Tuesday, September 7, Coinbase CEO Brian Armstrong took to Twitter expressing his dismay at the SEC action and noting that how it can harm the industry. In particular, the SEC seems to be having an issue with Coinbase offering yield returns on the USDC stablecoins.

Any major crackdown by the SEC on Coinbase can have far-reaching consequences on the entire crypto industry. Potentially, it can also trigger a major crypto market sell-off as the SEC extends its scrutiny on fiat-linked crypto stablecoins.

We have seen this happening back in 2018-2019 when regulators swept the market putting the overall crypto space under pressure for a long time. Speaking to Yahoo Finance on Wednesday, September 8, Celsius Network co-founder Alex Mashinsky said:

“I think we’re going through these murky waters right now and we need to get clarity and its going to take a little bit of time before we get the rules and we can start running faster.”

The crypto industry is certainly looking for more clarity on the matter. Especially, it wants to hear from the SEC as to how the regulator considers lending as security. This is yet another major rift initiated by the SEC after its long-going brawl with Ripple.

SEC’s Gary Gensler Gets Touch on Crypto

Often touted as the ‘crypto-friendly SEC chairman’, Gary Gensler has proved to be a tough nut to crack. Since his appointment as the SEC chairman in April 2021, Gensler has hinted at going tough on crypto.

The SEC chairman called the crypto industry “the wild west of our financial system” that “desperately needs rules of the road”. Gensler said that the SEC will step up efforts in scrutinizing firms offering products that seem like securities. He noted that they are closely watching the decentralized finance (DeFi) market. Speaking to Bloomberg, James Cox, a professor at Duke University School of Law said:

“The SEC is being aggressive for the first time in a long time. The SEC has been putting a lot of muscle into cryptocurrency. It’s a big, fast-growing market and a fertile area for abuses.”

Coinbase Receives Support from Crypto Backers

However, a lot of supporters of crypto have also come in support of Coinbase after the recent SEC news. Billionaire investor Mark Cuban asked Coinbase CEO Brian Armstrong to go on the offensive. Cuban wrote:

Brian, this is “Regulation via Litigation”. They aren’t capable of working through this themselves and are afraid of making mistakes in doing so. They leave it to the lawyers. Just the people you don’t want impacting the new technologies. You have to go on the offensive.

The worst case is that the SEC gets a judgement that cripples Crypto/DeFi and moves it even further offshore, killing possibly trillions of $$$ in economic benefit for the USA. We need exemptions like the internet got in the 90s.

Possibly, if the crypto firms unite for the good, they can potentially work with the SEC to bring regulatory clarity faster.