The Gap Between Crypto and the SEC Is Widening. Legal Experts Weigh In

Web3 entities and the regulatory agencies that oversee them are at a low point in their relationship.

For years, crypto exchanges and the Securities and Exchange Commission (SEC) have repeatedly disagreed about whether or not digital assets like cryptocurrencies and NFTs constitute securities. That gap only seems to be getting bigger, as 2022 has seen the friction surrounding this fundamental disagreement produce more and more heat.

In March, the agency opened an investigation into various NFT marketplaces for potentially buying and selling securities. In July, it announced a similar investigation into popular crypto exchange Coinbase for adding a number of tokens to its platform, despite the agency’s previous reviewal of Coinbase’s listing processes and the company’s repeated insistence that it’s not in the securities business.

Web3 companies are rightfully on edge, and their frustration is almost palpable. So divisive is the agency’s enforcement-heavy stance on the securities question that even SEC Commissioner Hester Peirce recently shared her dissenting views on the matter, saying what the regulatory body is doing is “just not a healthy process.”

How the SEC handles the securities question matters a great deal to the crypto world. Legally, if the courts decide that a digital asset is a security, it’s dead in the Web3 water, since no NFT platform or crypto exchange currently has a securities exchange license.

It’s rare for an industry to experience a schism in which there is near total disagreement between companies and the regulatory agencies tasked with overseeing them. According to some, however, the issue may be exacerbated by optics and politics.

“When there’s a trillion-dollar market, any SEC chairman has to know that if he or she wades into that, it can be completely consuming and put them in the middle of a food fight between traditional financial services and crypto companies,” explained Davis Polk law firm partner and crypto legal expert Joe Hall in a recent interview with Forbes. 

“It’s easy to criticize the SEC from the outside,” Hall continued. “But I know exactly why they’re doing it. There is just no benefit from the point of view of an individual to stick your neck out and actually try to solve the problem. It’s much easier to bring enforcement actions against people for violating the laws.”

Web3 companies continue to carry out their day-to-day operations despite concerns that they might become the next subject of SEC scrutiny. One thing is certain, though — how the securities question gets resolved will significantly impact the future of Web3.

“How this plays out in the coming months will shape the future of much of the existing crypto industry,” said Jai Massari, chief legal officer at blockchain startup Lightspark, in the Forbes report.

Regardless, the tension and ambiguity that mark the current regulatory landscape can’t continue forever. Legally, Web3 will need to stabilize at some point, but that point might come later rather than sooner.