• Mark Cuban says SEC rules on token registration is a "nightmare that's waiting for the crypto industry"
  • In SEC insider trading charges, the commission said that nine cryptocurrencies were actually securities
  • Increased regulation could give more investor protection but it may also bring more red tape for crypto projects

It may seem surprising that the SEC's (Securities and Exchange Commission) move to prosecute three people for crypto insider trading has attracted widespread criticism. It alleges that a former Coinbase employee tipped off his brother and a friend about which assets would be listed on the exchange.

Surely, taking action against insider trading is a good thing? Well, yes. But it isn't the charge itself that has the industry up in arms. In its press release about the charges, the SEC slipped in a line that said nine of the 25 assets the trio traded were actually securities. It has not revealed which crypto assets these might be.

If many cryptocurrencies are actually securities, the SEC can prosecute them for failing to register themselves. Any cryptos found to be unregistered securities could face huge fines, and would then need to jump through a bunch of legislative hurdles to be able to operate and be traded in the U.S. This is why various crypto insiders, including Shark Tank judge Mark Cuban, are worried.

Are cryptos commodities or securities?

The debate on how to define a cryptocurrency is almost as old as the digital asset industry itself. Right now, most cryptos in the U.S. are classified as commodities, which means they come under the remit of the CFTC (Commodities and Futures Trading Commission) and don't have to follow the SEC's security rules. Securities are controlled by the SEC, and there are strict rules in place about how they can be traded and what information they have to report. A lot of crypto exchanges aren't licensed to trade securities.

The SEC is in the middle of a lawsuit against one crypto, Ripple (XRP) which it says has been operating as an unregistered security. Its boss, Gary Gensler, believes that a number of existing cryptocurrencies are in the same boat and are operating as unregistered securities. But crypto execs say the rules aren't clear and haven't been properly communicated.

Crypto industry insiders -- including the CFTC -- accuse the SEC of regulation by enforcement. This is essentially creating rules by prosecuting individual cases rather than creating a clear regulatory framework that people can follow. Indeed, Coinbase immediately filed a petition calling on the SEC to develop a "workable regulatory framework for digital asset securities."

Why Mark Cuban thinks it would be a 'nightmare'

Many in the industry are criticizing the SEC for pursuing prosecutions without first setting clear rules. But for Cuban, it's the very creation of those rules that could create a problem. In response to a tweet from Senator Pat Toomey on the subject, Cuban tweeted: "Think this is bad? Wait till you see what they come up with for registration of tokens. That's the nightmare that's waiting for the crypto industry."

In the past, Cuban has said that he thinks more regulation is needed. However, the big debate is over what shape that regulation should take. For example, Cuban believes crypto regulation should be built around existing fraud laws. He doesn't want to see a lot of red tape that, as he puts it, would "keep thousands of lawyers employed."

On the other side of the debate, people like Treasury Secretary Janet Yellen want to see a "comprehensive framework so that there are no gaps in the regulation." Various agencies are in the process of responding to President Biden's executive order, which would create a framework for crypto legislation. It isn't yet clear how onerous that framework will be on existing projects and exchanges.

Bottom line

Increased regulation is coming, and it will have a big impact on the crypto industry. In the long term, it may build confidence and give the whole market more solid foundations. However, it will almost certainly mean crypto projects have to follow a lot more rules, which could be expensive and time consuming. As a crypto investor, it's worth watching -- and even participating -- in these discussions. The shape of any new crypto regulation could have a big impact on how your investments perform in the long term.

This article originally appeared in The Motley Fool.

Emma Newbery owns the English-language newspaper The Bogota Post. She began her editorial career at a financial website in the U.K. over 20 years ago and has been contributing to The Ascent since 2019. The Motley Fool has a disclosure policy.

Mark Cuban
President Donald Trump tweeted that Dallas Mavericks owner, Mark Cuban is "not smart enough to run for president," Feb. 12, 2017. In this photo, Dallas Mavericks owner Mark Cuban apologized to Trayvon Martin's family for using the phrase "black kid in a hoodie" during an interview about racism, but reiterated that he meant what he said while speaking to Inc. Magazine in 2014. Reuters