The interplay between U.S. government regulatory bodies and cryptocurrency exchanges has always been fraught with tension. Unfortunately, the tendency has been to drive the burgeoning digital asset industry offshore instead of harnessing its potential through greater cooperation with compliant-minded, U.S.-based exchanges like Coinbase.
This tension was underscored recently when Coinbase CEO Brian Armstrong publicly appealed to the next SEC Chair to reconsider what he termed “frivolous” lawsuits plaguing the crypto industry. Armstrong’s plea highlights the frustration felt by many U.S. crypto companies grappling with regulatory ambiguity. Notably, Coinbase has emerged as a vocal proponent for clearer regulations, directly challenging the SEC’s shifting positions rather than seeking settlements.
In a revealing tweet, Armstrong shared a flowchart depicting the SEC’s evolving stance on digital assets. For instance, the SEC in 2018 did not classify digital assets as securities. Yet, by 2021, it reversed its stance, asserting that certain digital asset transactions should indeed be considered securities. This flip-flopping has sown confusion across the sector, leaving exchanges like Coinbase clamoring for a definitive regulatory roadmap. Despite this, the SEC has not shied away from pursuing enforcement actions against various crypto projects without clear compliance guidelines.
Token Creation and Consumer Protection
While Armstrong is right to urge clear regulatory guidance, it is difficult not to concede the necessity for regulatory intervention in the digital asset space. This need is most evident when you look at the launching of new digital tokens. There has been a recurring theme this year: projects promote a token with negligible intrinsic utility, release a limited quantity at inflated prices, and then witness its market value plummet. Many of these predatory projects take advantage of uninformed consumers and are reminiscent of old-school “pump and dump” stock scheme.
Some industry defenders attribute this trend to “regulatory uncertainty,” claiming that only memecoins (a type of cryptocurrency that is inspired by internet memes, characters, or trends, often created with a humorous intent and generally lacking in useful utility) can endure the scrutiny of the U.S. Securities and Exchange Commission (SEC) and asserting the impossibility of initiating substantial projects without breaching federal securities laws. Despite such claims, there appears to be a consistent strategy to successful digital coins launches: create tokens that have purpose and govern them in a truly decentralized environment. This approach, when coupled with competent legal advice, promotes greater regulatory compliance and preparation for SEC examination.
Utility of Tokens
A token’s utility is best determined by its desirability for purposes other than investment. Some tokens, for instance, provide access to blockchain-based services, akin to how a baseball ticket grants entry to a game. Others may facilitate governance decisions, incentivize contributions to infrastructure, or recognize system inputs non-investment-related.
Bitcoin exemplifies a useful token by enabling decentralized transactions and securing its network through incentivized mining. Similarly, tokens in decentralized physical infrastructure network (DePIN) projects are crucial. They motivate global participation in providing services like data storage or connectivity, efficiently integrating operators into a blockchain irrespective of geographic boundaries.
Fairness of Tokens
The essence of fairness in tokens can be gauged by what has been described as the front page test: would you be proud if the details of your project were publicized on the front page of a major newspaper following its success?
A common issue is “decentralization theater,” where token creators feign community governance or permissionless frameworks to attract public support while retaining control or disproportionately favoring insiders. Such practices can mislead token holders and potentially constitute fraud.
Conclusion
A more collaborative approach between the digital assets industry, and US regulatory agencies is paramount for the United States to maintain its leadership position in this creative and important new economic frontier. Government regulators must accept that these assets are here to stay, and they must strike a balance in its regulatory efforts that foster growth while limiting opportunities for bad actors to exploit and defraud unsuspecting consumers. We do not suggest that this is easy – we recognize the challenges presented but effective regulation always begins with open-minded collaboration with industry leaders and not the current “us versus them” mindset. We encourage regulators to work more collaboratively with compliance-minded, US-based companies such as Coinbase to strike that effective balance which will foster economic growth and consumer protection.
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