There’s a big debate in crypto right now over how it should be regulated. Critics say the SEC is enforcing rules that shouldn’t apply to cryptocurrencies. Regulators say they’re just trying to protect consumers.

The SEC’s insider trading case against a former Coinbase employee, which claims that nine of the 25 cryptocurrencies involved are securities, has raised the ire of a senator, fellow regulators and of course Coinbase, which plainly said, “Coinbase does not list securities. End of story.”

• The gist of their complaints is that the SEC is being too vague and in turn creating sweeping and broadly worded de facto regulation.
• “It speaks to a balancing act for all regulation: crafting protections broad enough they can’t be easily evaded, but specific enough that businesses can operate with certainty,” Protocol reporters Ben Brody and Ryan Deffenbaugh write.

The crypto industry’s argument against regulation by enforcement is that digital assets are a new frontier and don't fit into existing rules.

• Industry experts argue that Congress needs to provide clarity on what fits where. And if Congress doesn’t take action, then regulators need to act.
• "Regulation by enforcement precludes any meaningful discussion of what should and shouldn’t be considered a security—a question that is too important and far-reaching to be decided solely by punitive action," Kristin Smith, the executive director of the lobbying group Blockchain Association, told Protocol.

In regulators’ eyes, the SEC is just acting to protect people and ensure fair markets in a developing industry.

• "Some market participants may call this regulation by enforcement," Gensler said in a November speech. "I just call it enforcement.”

Legislation has already been introduced, such as the Lummis-Gillibrand and Stabenow-Boozman bills. But for now, the battles will continue in court, because that’s all regulators can do to actually regulate.

— Nat Rubio-Licht