The SEC has sued to take down Coinbase. This will force us to confront the fact that US trading rules, written in 1934, need to be changed.
The SEC has seems to have two motivations.
- One, they think that crypto is bad on average (speculation, scams, AML, not much economic value). So, they are just vandalizing it. Matt Levine writes that the SEC is trying to kill crypto “as a sort of slow-burn revenge for crypto’s attempt to arbitrage around the SEC.”
- Two, they really do think that it is important to separate trading from custody, so that users have reliable custodians and don’t get FTX’d.
This is the structure that they approved for Bosonic. Trades get matched on an exchange, and settled to custody. Interestingly, Binance has also started moving to this structure for their pro accounts. Off-exchange custody is good for traders.
However, “settlement to custody” creates a problem for everyone except pure traders.
- You can’t run a blockchain if you have to settle transfers to custody. Blockchains run on the assumption that their gas tokens get exchanged between machines, not people or custodians.
- You can’t run DeFi if you have to send each transfer out for settlement. DeFi smart contracts take custody, get an atomic settlement, and pass the results on to “compose”. Digital assets have a lot of value if they can supply software agents that do this type of automation. Not allowing software to own and use tokens removes the primary value of the “digital asset” category. This is why “digital asset” ATS systems have been dead on arrival. They kill the value of the underlying assets.
It is possible that the SEC understands these problems and is using them with an intent to vandalize. They have also made it difficult or impossible to get qualified as a custodian, or any other role that deals with crypto.
In any case, the political focus should be on changing exchange rules that were originally written in 1934. Crypto can accommodate a lot of securities and commodities rules. However, crypto cannot accommodate the old rules for exchange and settlement, and also be useful.
Exchange has to be moved out of the US (the DeFi-ready securities approach), or US rules need some straightforward changes to allow atomic exchange between machines, software, and self-custody.