Crypto’s story is a fascinating one.

It’s a trillion-dollar asset class that went from zero to 100 million users in less than a decade…

And it did so with no institutional support.

Although it’s been drowned out by the bad actors and, albeit, embarrassing blow-ups…

The better half of the crypto industry is trying to push forward simple and timeless principles of sound banking in a digital world.

Fundamentally, the industry has been advocating for things like full-reserve banking, auditability, transparency, and immutability. At the center is decentralization -- resiliency by design.

Crypto is fundamentally open source, a feature that allows anyone to verify for themselves that what the issuers are saying is true. It offers credible neutrality in a world almost entirely absent of it. And it offers self-custody in a world of perpetual counterparty risk.

Also, no surprise…

Like any other early-stage tech market, it’s volatile and fraught with risk.

Of course, it would’ve been naive to expect regulators to embrace crypto with open arms. But few benefit from the SEC’s bipolar regulation by enforcement, a weapon of which has now been pointed at Coinbase.

We Asked. They Threatened.

Yesterday, Coinbase founder Brian Armstrong announced the company received a Wells notice from the SEC with regards to its “staking and asset listings.” A Wells notice, Armstrong points out, “typically precedes an enforcement action.”

This isn’t groundbreaking or shocking. But the way the SEC has gone about this is bizarre.

For starters, it was two years ago that the SEC reviewed Coinbase and approved it to go public. And nothing has changed to its business model since. According to Armstrong, “Our S1 clearly explained our asset listing process and included 57 references to staking.”

And then, last year, the SEC invited the company to discuss, according to Coinbase’s Chief Legal Officer, Paul Grewal, “a potential resolution that would include registering some portion of our business with the SEC.”

Coinbase agreed. The SEC asked them to provide their views on what a registration path should look like.

Coinbase spent millions of dollars on legal support to create these proposals for the SEC, repeatedly asking for their feedback.

But, in a span of nine months, Coinbase met with the SEC over 30 times, never receiving feedback on their proposals.

“In December 2022,” Grewal wrote, “we asked the SEC again for some feedback on our proposals. The SEC staff agreed to provide feedback in January 2023. In January, the day before our scheduled meeting, the SEC canceled on us and told us they would be shifting back to an enforcement investigation.”

Inside Dissent

The SEC is made up of five Commissioners, one of which is the chair. While the commissioners help steer the ship, the chair sets the agenda.

Hester Peirce, one of five SEC Commissioners, has long been an advocate of sensible policy at the SEC, calling for a less hostile and more productive SEC posture.

But it’s a two-way street, she says:

“I’m trying to push from inside for us to have more productive conversations within the industry, but I think that needs to also come from people who use crypto.”

Problem is, just like any regulatory body, the SEC desires to expand its jurisdiction in as many directions as possible. And crypto has been an easy target in that direction.

“The issue is that we are taking positions that maximize our jurisdictional reach,” she said, adding that: “If we apply the analysis we’ve been applying with respect to crypto, we would be regulating a lot of things that we’re not regulating now.”

It’s not lost on Commissioner Peirce that the purpose of decentralization is to solve a lot of the problems that regulators are tasked with solving.

She said:

The decentralized model really solves a lot of the problems that you would be trying to solve with regulation.

Everything is open source so everyone can see what the terms are that they're engaging on. No one has access to more information than anyone else. And no one is able to shut anyone else's access off… everything is accessible to everyone. And so whatever we do I think we need to carve out the decentralized aspects… A different regulatory approach needs to be taken. I would argue a much different one where a lot of that doesn't need the regulator sitting on top and watching what's going on.

It’s the worst regulatory environment we’ve ever seen.

Meanwhile, the world is changing rapidly.

Hong Kong is softening its stance on crypto… the UK released a proposal for sensible regulation…

As the US tries to export and enforce its rules on the world, it increasingly feels like the world has stopped listening.