The gap between Crypto and the SEC is widening. Legal experts weigh in

Web3 devices and the regulatory agencies that oversee them are at a low point in the relationship.

For years, crypto exchanges and the Securities and Exchange Commission (SEC) have repeatedly disagreed over whether or not digital assets such as cryptocurrencies and NFTs constitute securities. That gap only looks set to widen, as 2022 has seen the friction around this fundamental disagreement produce more and more heat.

In March, the agency opened an investigation into various NFT marketplaces for the potential buying and selling of securities. In July, it announced a similar investigation into popular crypto exchange Coinbase for adding a number of tokens to its platform, despite the agency’s previous review of Coinbase’s listing processes and the company’s repeated insistence that it is not in the securities business.

Web3 companies are rightfully on edge, and their frustration is almost palpable. So divisive is the agency’s enforcement-heavy stance on the securities issue that even SEC Commissioner Hester Peirce recently shared her dissenting view on the matter, saying what the regulator is doing is “just not a healthy process.”

How the SEC handles the securities issue matters a lot to the crypto world. Legally, if the courts decide that a digital asset is a security, it is dead in the Web3 water, as no NFT platform or crypto exchange currently holds a securities exchange license.

It is rare for an industry to experience a schism where there is almost total disagreement between companies and the regulatory bodies tasked with overseeing them. According to some, however, the problem may be exacerbated by optics and politics.

“When it’s a trillion-dollar market, any SEC chairman needs to know that if he or she wades into it, it can be all-consuming and put them in the middle of a food fight between traditional financial services and crypto companies,” explained Davis Polk law firm partner and crypto legal expert Joe Hall in a recent interview with Forbes.

“It’s easy to criticize the SEC from the outside,” Hall continued. “But I know exactly why they do it. There’s just no benefit from an individual’s point of view to stick their neck out and actually try to solve the problem. It’s a lot easier to impose enforcement actions against people for breaking the laws.”

Web3 companies continue to conduct their day-to-day operations despite concerns that they may become the next subject of SEC scrutiny. However, one thing is certain – how the securities issue is resolved will have a significant impact on the future of Web3.

“How this plays out in the coming months will shape the future of much of the existing crypto industry,” Jai Massari, CEO of blockchain startup Lightspark, said in Forbes report.

Regardless, the tension and ambiguity that characterizes the current regulatory landscape cannot continue forever. Legally, Web3 will have to stabilize at some point, but that point may come later rather than sooner.