Can the Courts End Crypto’s Existential Crisis?

Could we be nearing an answer to the question of whether digital tokens are securities or commodities? At Intelligize, we certainly hope so. We’ve written in the past about how tiresome this existential debate has become.

It appears the legal system may settle the matter soon enough. Coinbase Global Inc. is currently facing a class-action suit that claims dozens of the digital tokens listed on its crypto trading platform qualify as unregistered securities. The group includes major cryptocurrencies such as Dogecoin and XRP.

As The Wall Street Journal recently noted, investors have filed eight class-action lawsuits in 2022 related to cryptocurrencies. That sits well ahead of the pace of 2021, when 11 were filed. The wave of lawsuits comes as little shock, given the crypto market crash that has taken place in the first half of the year.

The Coinbase lawsuit is part of that trend. It can’t move forward, though, if cryptocurrencies don’t fall under the umbrella of securities. In a sign of how convoluted the issue is, consider that Coinbase is arguing that the cryptocurrencies involved in the case don’t constitute securities. Meanwhile, the issuer of the Block.one digital token, which is involved in the case, settled a lawsuit in 2021 charging that another of its tokens, EOS, qualified as an unregistered security.

A ruling that the tokens represent securities could have far-reaching implications for the sector by putting crypto under the jurisdiction of the Securities and Exchange Commission. That means dropping a phalanx of regulatory requirements on top of cryptocurrencies and the entities that sell them. Naturally, cryptocurrency platforms would prefer to avoid that designation and the regulatory burdens that come with it. They would rather see digital tokens be considered commodities, which are regulated by the Commodities and Futures Trading Commission and require less onerous regulation.

While CFTC Chairman Rostin Benham recently downplayed any friction between the agencies on the matter, the dilemma has led to a tug-of-war in Washington between the SEC and CFTC. A recent memo from the law firm of K&L Gates laid out the arguments on both sides. Early signs from Capitol Hill – in the form of a bipartisan bill in the House of Representatives – point to crypto trading platforms landing under the oversight of the CFTC.

But what if courts start coming down uniformly on the side that cryptocurrencies are securities? Against that confusing backdrop, an alternative approach of creating a new agency to regulate the crypto industry may gain favor with lawmakers. Coinbase has championed just such an approach in its lobbying efforts. Although some politicians – especially those on the Democratic side of the aisle – could bristle at the idea for that reason alone, they might find a new regulator for crypto ultimately provides a reasonable solution to the uncertainty that has lingered over the sector for too long.