SEC Commissioners Criticize ShapeShift Settlement for Lack of Clarity

A recent settlement between the Securities and Exchange Commission (SEC) and cryptocurrency firm ShapeShift has received criticism from within the agency. SEC Commissioners Hester Peirce and Mark Uyeda have made public statements to show their dissatisfaction with the current situation when they believe that the SEC, in general, and this enforcement case in particular, has reinforced the ambiguity of the SEC approach to cryptocurrency regulation.

SEC Commissioners Criticism

However, Peirce and Uyeda’s criticism is the SEC’s use of the Howey Test— a standard derived from a 1946 U.S. Supreme Court case— to classify some assets. 

Notwithstanding this standard, the commissioners indicated that the recent order by the SEC against ShapeShift did not specify which of the 79 crypto assets involved were considered investment contracts or give a justification for such classifications. Peirce and Uyeda argue that the lack of specificity results in more general uncertainty about its classification and regulation within the crypto industry.

Enforcement Approach Under Scrutiny

The critique goes past the ShapeShift affair to encompass the SEC’s overall crypto space enforcement approach. The SEC has sued several crypto companies in recent years, notably lawsuits against exchanges such as Binance and Coinbase. 

SEC Chair Gary Gensler has maintained that many cryptocurrencies should be considered securities and that crypto platforms must register with the SEC. However, Peirce and Uyeda argue that this “just come in and register” stance lacks substance and clarity, especially when specific classifications of crypto assets as securities remain opaque.

The Ripple Effect of Ambiguity

The controversy over whether crypto assets should be characterized as securities is nothing new, however, now legal updates have revived it. The ruling of a U.S. court, published last week, says that trading certain cryptocurrencies on secondary markets is the selling of securities. 

However, many cryptocurrency industry insiders believe the exact opposite. This judgment and attempt by the SEC to use it to strengthen its suit against Coinbase emphasize the legal and regulatory headwinds that the crypto industry is currently facing.

Despite these challenges, Coinbase has pushed back against the SEC’s interpretation, arguing that judgments from unrelated cases should not influence ongoing litigation. Similarly, the partial victory achieved by Ripple in a recent lawsuit, where a judge ruled that sales of XRP to institutional investors were unlawful securities sales but that “blind bid” sales to retail investors were not, highlights the nuanced and evolving nature of securities regulation in the context of cryptocurrency.

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