There's always a trade-off between innovation and regulation. Nowhere is this more apparent than the cryptocurrency world, where innovations like decentralized finance (defi), initial coin offerings (ICO), and NFTs seem ripe for fraud. Of course, regulating these entities is quite difficult given their decentralized nature and the pace at which the industry moves.
However, the U.S. Securities and Exchange Commission (SEC) does seem to be taking some initial steps towards regulating this arena especially now it can target Coinbase
Essentially, Armstrong detailed his months-long conversation with the SEC which ended with the regulatory agency saying that Coinbase would be sued if it went ahead with launching the product. Many crypto brokerages like Binance offer products for users to generate interest, however since Coinbase is a U.S. financial institution, these lending products are considered securities.
The crux of the matter is stablecoins. Many see this as a systemic risk to the cryptocurrency industry especially given that many coins and defi protocols are interconnected and built on top of stablecoins. Recently, the Federal Reserve has warned about the risks of a run on stablecoins. Until now, the SEC has said that cryptocurrencies are not securities so they don't need to be as closely regulated but it seems to be indicating that stablecoins are securities.
Following Armstrong's tweets, Coinbase dropped by more than 10% over the next couple of trading sessions. It wouldn't be unusual for the SEC to set a precedent by going after the largest fish in the pond. It could also cause ripples that would be concerning for many investors in defi projects and other companies based in the U.S. that offer yield-generating products like FTX or BlockFi.
Many of these companies offer interest rates that are significantly higher than savings rates at banks. They have generated scrutiny from state governments who are probing how these systems work and whether they are sound with some states putting limits on marketing.
Until now, SEC Chair Gary Gensler seemed to have an open mind towards cryptocurrencies and even taught a course on blockchains at MIT. This might explain his more constructive stance towards the actual coins and blockchains, but a more harsh view of stablecoins which introduce leverage to the system and fall under the scope of the SEC.