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The Securities and Exchange Commission (SEC) has taken various actions against cryptocurrency platforms in recent times, contributing to the ongoing ambiguity regarding whether crypto falls under the jurisdiction of the SEC or the Commodity Futures Trading Commission (CFTC). Presently, most cryptocurrencies are treated as commodities. Nevertheless, the SEC contends that numerous
cryptocurrencies should be classified as securities, subject to its oversight. Securities adhere to stringent rules governing information sharing and trading, rules that do not apply to commodities.
In the past year, the SEC intervened to prevent Coinbase from launching a lend-earn product, charged two former employees with insider trading violations, and issued a Wells notice to Coinbase over potential securities violations—a prelude to enforcement action. Coinbase, in response, asserted that it does not list securities or offer products categorized as securities to its customers.
Apart from market volatility, the relative lack of regulation poses a significant risk for cryptocurrency investors. Instances like the FTX collapse underscore the limited investor protection and transparency concerning the utilization of customer funds by certain platforms
. The challenge lies in the industry's rapid growth within a regulatory framework with few rules. Regulators are now attempting to implement more stringent controls, akin to closing the gate after the horse has already bolted.
The Coinbase International Exchange
The newly established Coinbase International Exchange has obtained regulatory approval from the Bermuda Monetary Authority. However, it will exclusively cater to institutional investors in specific non-U.S. jurisdictions.
This exchange permits qualified investors to engage in perpetual crypto futures trading, a form of derivative trading that enables speculation on the future prices of commodities like Bitcoin (BTC) and Ethereum (ETH).
Unlike traditional futures contracts, perpetual futures lack an expiration date, allowing traders to maintain open positions for extended periods.
The exchange also offers up to five times leverage, allowing investors to magnify both gains and losses by trading with borrowed funds. This approach to leverage and derivatives trading, particularly in the volatile crypto asset class, entails considerable risk.
Coinbase highlighted in a press release that perpetual futures constituted nearly 75% of global crypto trading volume in 2022, enhancing liquidity and providing traders with added flexibility in their strategies.
Implications for U.S. Investors
The new exchange is not accessible to U.S. investors due to stringent restrictions on crypto derivatives, especially for retail investors. While this service may have minimal direct impact on U.S. investors, Coinbase's increased international focus, coupled with Armstrong's hints at potential relocation, could influence American crypto investors.
Regulation remains a pivotal issue for U.S. crypto investors, with Coinbase criticizing what it perceives as a "regulation by enforcement" approach by the SEC.
The lack of clear guidelines has led to concerns that the SEC is penalizing the crypto industry without communicating how existing laws apply to their business.
In the long run, heightened regulation could bolster the industry's foundations and instill much-needed trust. However, in the short term, it might contribute to increased volatility and potentially prompt crypto companies to relocate. Such developments could impact the evolution of digital currencies in America and influence how investors engage in buying or selling cryptocurrencies. As an investor, it is crucial to closely monitor both industry and regulatory developments, as they may have implications for your portfolio.
