A few days ago, Kraken Chief Legal Officer said during an interview that the US crypto regulatory system is unsustainable.
For several months now, many US crypto exchanges, or foreign ones but operating in the US, have been having problems with the SEC in particular.
The SEC is the local authority that oversees the financial markets, particularly the security markets, and is in fact accusing almost all crypto exchanges of allowing trading of unregistered securities.
Lack of clarity
The problem is the lack of regulatory clarity, particularly in the United States it is still unclear how traditional rules should be applied to new crypto markets in the absence of specific regulation for digital assets.
In the EU, they have already solved the problem with the MiCAR, which is the Markets in Crypto-Assets Regulation.
As such, around the world there are those who have already tried to provide regulatory clarity, and those who have not yet been able to give crypto operators a certain and clear regulatory framework on which they can safely operate.
To be fair, the issue raised by the SEC has not yet been clarified by the European Union either, but while in the EU not a single financial market supervisory agency has so far raised the issue by accusing exchanges, the SEC has done so.
However, it is not the SEC that has the power to arbitrarily decide what is to be considered a security or not, otherwise it would have already done so. The decision is up to the justice system, i.e. the courts, which in theory should rule on each individual cryptocurrency. It would be much simpler and clearer if instead it were Congress to express a clear and definitive opinion on the matter, perhaps with an ad hoc law.
Kraken position on crypto regulations
Kraken is one of the largest US crypto exchanges, especially since the demise of FTX. It is a historic exchange, as it has been around since 2011, and has always had a position that is quite close to the libertarian principles that led to the birth of Bitcoin.
Kraken’s CLO, Marco Santori, expressed what could be considered the company’s position on the state of crypto regulation in the US, and the problems it is causing exchanges.
He did so during an interview with Forbes, after participating as a witness in the hearing held in the House of Representatives and dedicated precisely to the future of digital assets.
Santori is a true expert on such issues, with experience going all the way back to 2014.
First, he stated in no uncertain terms that the “situation in the US is untenable” regarding crypto operators, and that something would need to be done about it.
While agreeing to stress the importance of consumer protection, he would also like to ensure that innovation continues to go in the US.
Instead, it seems that US exchanges are trying to get out of the country, with, for example, the largest US crypto exchange just opening a new international version based in Bermuda.
For Santori, the main problem right now is really the jurisdictional battle between the SEC and the CFTC, with the SEC trying to gain more power in this regard by claiming that cryptocurrencies are securities, while according to the CFTC (Commodity Futures Trading Commission) most would be commodities.
The registration requirement for exchanges
The SEC’s real goal seems to be to get to the point of requiring all crypto exchanges to register with its registry so that it has the authority to monitor them.
It is worth mentioning that in order to allow the buying and selling of securities, not only the securities themselves must obtain approval and registration with the SEC, but also the platforms that allow their trading.
In contrast, to allow the trading of commodities, no special authorization is required, so much so that until now the US exchanges have been able to operate without a registration requirement. To be fair, there are already more stringent regulations in some states, but both Coinbase and Kraken are innovative California-based companies, where regulations in this regard are freer and less stringent.
Although Bitcoin is widely considered a commodity, even the nature of Ethereum is now being questioned, perhaps only to try to get at forcing crypto exchanges to register.
It is possible that there are hundreds, if not thousands of cryptocurrencies that would be considered unregistered securities, but regarding Ethereum it is more than fair to have doubts. The chairman of the SEC himself, Gary Gensler, until relatively recently considered it a commodity, but in recent times has changed his mind.
According to Kraken’s CLO, it would be preferable for the CFTC to gain regulatory primacy over the crypto sector instead, because it considers cryptocurrencies listed on the exchange to not be securities.
The Forbes interviewer points out that Kraken, like many other exchanges, conducts an analysis before listing any token, and these analyses would indicate that those listed on the exchange are not securities.
The fact remains that, as things stand at present, only the judiciary can make a definitive ruling on the matter, and so far it has not done so. Indeed, the SEC has been in litigation against Ripple for more than two years now, accusing it of selling XRP as an unregistered security, and as of yet the court has not ruled on the matter.
Moreover, the CFTC does not require registration, while Santori revealed that the SEC’s claim that it would be easy to register with them is “baffling.”
He pointed out how a traditional S-1 document, or what companies file with the SEC as part of their application, can actually cost millions of dollars to fill out correctly. For example, a crypto project should include data regarding the number and distribution of nodes, the amount of developers, commits on Github, and so on.
Beyond Kraken, new crypto laws in the US
The US Congress has actually been working on specific regulation for the crypto market for some time, but so far they have not been able to get to the bottom of it.
The same hearing that Santori attended led to the decision that two subcommittees will have to agree on the text of the new law in order for it to move forward and be presented to the Senate.
In other words, such a law to date seems mired in classic palace squabbles, perhaps due in part to too partial a knowledge of the subject matter on the part of the politicians who have to rule on it.
In fact, in order to speed up the process, they could take a cue from the European MiCAR, but they apparently prefer a different approach.
What is perhaps not yet sufficiently clear is whether the policy orientation in the US is more inclined to prioritize consumer protection, as has been the case in the EU, or instead is more inclined to prioritize innovation, as, for example, is happening in the United Arab Emirates (UAE).
The fact is that the EU does not have a leadership role in crypto to maintain or consolidate, while the US does. That role, globally, is threatened by countries like the UAE, or Switzerland, and perhaps that is precisely why US policy cannot make up its mind.
On the one hand it probably wishes it were able to do as it did in the EU, tightening regulations regarding crypto markets, but on the other hand it is afraid that doing so could leave the leadership of the industry to other countries. The crypto exchanges for now are caught in the middle, which causes them several headaches.