If a business’s application is rejected by the SEC, it cannot offer securities-related services in the US, at least in the form described in its application. Because of confusion over the classification of crypto assets, this eventuality could pose an “existential threat,” says Siemer. “To go in and register means to cease to exist,” he says. “There is no framework; there is no path.”
The question of what crypto is could be resolved in the courts. An ongoing case between the SEC and cross-border payments company Ripple over cryptocurrency XRP, for example, is expected to go some way to clarifying whether cryptocurrencies should be treated as securities (and be regulated by the SEC) or not. After two years, a verdict in the case is near, but because it’s playing out in a district court, it will not establish binding precedent. However, a victory for the SEC would strengthen its case for becoming the de facto crypto regulator.
People in the industry say that a better resolution would be for the US Congress to put in place comprehensive legislation governing crypto. The European Union is on track to introduce broad-based crypto legislation in 2024, under the Markets in Crypto Act (MiCA), and countries like Japan and the UAE have also moved quickly, but the US lags behind. A number of crypto-related bills were tabled in the 177th Congress, but died when the latest session ended in December, and so will need to be formally reintroduced and debated again.
Mulvaney, who spent six years in the House of Representatives, says it is unlikely that anything resembling comprehensive crypto legislation makes its way through Congress this year, ahead of the 2024 presidential election. But the silver lining, he says, is that crypto is “bipartisan”—it appeals to libertarian beliefs on both sides of the political divide—which means the issue of legislation will not be settled along “tribal lines.”
“It’s tough to operate with no regulation, because you don’t know what you are,” says Mulvaney. “You don’t want to be over-regulated … but you need enough to give guidance and clarity. That’s the sweet spot.”
In some parts of the crypto community, the refusal of regulators to set clear lines has been interpreted as a deliberate attempt to squeeze the industry out of the US.
Irrespective of the intention, the consequence of continued ambiguity over the classification of crypto assets, the regulator in charge, and the process of registering services with the government is likely to be an exodus of crypto businesses from the country, say Mulvaney and Siemer.
In late March, Circle Internet Financial, issuer of the USDC stablecoin, announced plans to establish a European headquarters in Paris. According to a Bloomberg report, Coinbase is also plotting an offshore version of its trading platform. Grewal declined to confirm, but says the company is “paying careful attention to the growth of markets outside the US.”
A similar pattern is playing out among smaller crypto firms. Wave Digital Assets is preparing its own contingency plan, Siemer says. Although the company is not yet considering leaving the US, it has halted hiring in the country over concerns about the regulatory climate.
Peirce, the SEC commissioner, says the agency’s objective is to help enable safe experimentation with technology, not to push the crypto industry offshore. But she is sympathetic to the interpretation. “If you’re trying to send the message that you want crypto in the United States, but you want it to be compliant, the way to send that message is to help companies [to become compliant]. But we don’t see that happening,” she says.
“You don’t repair the situation by saying ‘come in and register’—because nobody knows what that means—but by bringing everyone into a room and having a conversation like adults.”
