Proper crypto regulation ‘needs to come from Congress’ amid SEC’s Coinbase investigation: Analyst

Oppenheimer Executive Director and Senior Analyst Owen Lau breaks down the SEC's warning to Coinbase over the potential for legal action against the company.

Video transcript

- The Securities and Exchange Commission says it plans to take what it calls enforcement action against Coinbase, the latest escalation in its crackdown on cryptocurrency firms, that action prompting Oppenheimer's Executive Director and Senior Analyst Owen Lau to downgrade the exchange and push shares, we can see down almost 15%. It has been a rough day for Coinbase. Why the downgrade? How significant is the damage for Coinbase here?

OWEN LAU: First of all, thank you for having me. Yeah, this is a rough day for Coinbase. And why the downgrade? A couple of reasons, number one, the Wells notice. And Coinbase is a good actor in this space. And you can argue that if the SEC were to take actions, many other actors may guard the actions or get the kind of investigation first. And Coinbase has been operating in a relatively transparent way.

So I am actually pretty surprised to Coinbase get the Wells notice. And to me, this is an indication that there will be more enforcement actions against not just Coinbase, but the whole industry, and then the second reason being not many people talk about the economic report of the president got published on Monday. And it got actually a lot of the response from the crypto industry. And in that report, the report has a lot of criticism against the utility of digital assets, which is a big change from the Treasury statement from last year.

- Owen, when it comes to the likelihood, though, of passing some crypto-related bills, at least in the near term, is that likely? Or when do you think we'll see a wider crackdown here from regulators?

OWEN LAU: I actually went to DC yesterday. I attended an event. I talked to some staff members in the Congress and also talked to some industry experts on the ground. My impression from my conversation is the probability of passing a bill, like classify which one is securities, which one is commodities, or which agency would oversee crypto exchanges, like Coinbase, is very low.

I mean, it doesn't mean that it won't happen. But based on my conversation, I'm not optimistic about that. So what that means is before we have a regulatory clarity, there will be a vacuum for more enforcement actions. And that's the number one thing I am very worried about.

- Where will regulation eventually come from? Will it be the SEC, the CFTC? Will Congress agree on the rules of the road? Where does it need to come from?

OWEN LAU: It needs to come from the Congress. We need to have a legal framework first. We need to get bipartisan support. Based on my conversation yesterday, I was hopeful that there may be a new bill coming out next month or so. But you never know. You never count on a new bill coming out and get the bipartisan support from everybody. But the number one thing has to come from the Congress first. And then people can give the opinion.

And I mean, the other way is I'm most hopeful that the White House can take the leadership role to coordinate between CFTC and SEC so that we can minimize these regulations by enforcement actions. But based on the economic report, I think that probability is also very low.

- And Owen, despite all these concerns, despite the uncertainty out there, the price of Bitcoin has held up remarkably well. We're looking at it above 28,000 today. Last month it's been a gain of just over 17%, the last six months a gain of 45%. What do you make of this consistent momentum, essentially, to the upside here in Bitcoin?

OWEN LAU: So the run actually starts from, I think, two weeks ago when Signature Bank went down or got shut down. And that run tells me that people maybe worry about the traditional banking system in the United States. And they may view Bitcoin as a safe haven. We can argue that, whether this is true or not. But based on the relative performance, if you look at S&P 500 or BKX and Bitcoin, Bitcoin outperform a lot over the past two weeks.

So this is an indication that people would rather put their money into Bitcoin, which is more like a decentralized network, decentralized system. They don't have a single point of failure, unlike traditional banking system. And I think that that sentiment drives that run over the past two weeks.

OWEN LAU: Indeed. I just want to make sure we get in the statement from Coinbase. They told us "The SEC staff told us they have identified potential violations of securities law, but little more. We asked the SEC specifically to identify which assets on our platforms they believe may be securities, and they declined to do so." Just wanted to make sure we got on both sides of this. Owen, really appreciate your insights here. Thank you, sir.