Cryptocurrency exchange Coinbase has provided written testimony to the US House Committee on Financial Services, requesting clarity on core aspects of the cryptocurrency market.
The testimony centres around a key question: whether digital currencies are defined as securities for regulatory purposes.
It’s important because cryptocurrency exchanges in the US currently aren’t licensed to provide a platform for trading securities.
Securities can be defined as a financial instrument that holds some type of monetary value — with the most common example being publicly-listed stocks.
Right now, Coinbase only provides a support platform for four digital currencies — Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
“Part of the reason we trade only those four assets is that each has been determined by regulators to be a virtual currency and therefore not a security,” wrote Mike Lempres, Coinbase’s Chief Risk Officer.
“We are studiously avoiding listing tokens that could be determined to be securities because we are not currently licensed to trade securities and cannot take the risk of inadvertently trading an asset that is later found to be a security.”
It sets the stage for something of a regulatory battleground, given the central role that a large exchange such as Coinbase plays in the market.
Earlier this month, the price of Ripple’s XRP token shot higher on rumours that it would be added to the Coinbase exchange — then fell just as fast when those rumours were shut down.
Coinbase is the world’s biggest crypto exchange, with around 20 million customers.
And before it adds any more cryptocurrencies to its platform, Coinbase is seeking clarity from regulators about how they should be defined.
“Although regulatory coverage is deep and broad, it is not clear where one regulator’s authority ends and transitions to another.”
For example, the US Securities & Exchange Commission (SEC) says most digital currencies — particularly new initial coin offerings (ICOs) — are securities.
That differs from the current definitions provided by Commodities Futures Trading Commission (CFTC) and US tax authorities.
“There is so much uncertainty about the definition of a security and the scope of regulatory control that the market is being chilled,” Coinbase said.
“This is bad for everyone because the technology won’t stop — it will simply move overseas and we will miss out on the opportunity to cultivate the benefits in the U.S.”
Coinbase take the view that cryptocurrencies represent a new asset class — as tokens that provide a utility.
“For example, tokens can be used to access or acquire data storage space or to pay users to receive advertising.”
“These utility tokens provide access to goods or services provided by decentralized networks or ecosystems of users, rather than services provided by individual companies.”
An Australian example is Power Ledger, which raised $34 million in an ICO last year for utility tokens that allow households to trade surplus solar power.
Given the new technology behind cryptocurrencies represents something of an unknown, there’s no doubt that regulatory decisions will play a key role in how the market develops — and by extension, the future value of cryptos themselves.