The SEC complaints, filed in federal court, read like a catalogue of what’s wrong with the intermediaries through which most US investors interact with crypto. Both Binance and Coinbase sold products that had the features of securities, without registering as such. Much like the now-defunct FTX, they combined exchange, brokerage and clearing services — traditionally separated to avoid conflicts of interest — while failing to meet basic standards for disclosure or investor protection. Among other things, according to the SEC, firms controlled by Binance’s owners misused customer funds — putting nearly $200 million, for example, into an account that was used to buy a yacht — and engaged in “wash” trades that artificially inflated transaction volumes. The agency is right to crack down on such conduct.

Enforcement actions alone, though, won’t be enough to civilize the crypto market. One problem is that the SEC must establish jurisdiction in each case by proving that securities are involved. This should be relatively straightforward with Binance and Coinbase, but it won’t always be, and much of what’s traded on these and other platforms probably wouldn’t qualify. The two largest cryptocurrencies, Bitcoin and Ethereum, are defined as commodities by the Commodity Futures Trading Commission — which gives the CFTC authority over their derivatives, but not much over trading in the tokens themselves. Other tokens — including, potentially, those associated with useful projects — might be neither securities nor commodities.

This definitional confusion leaves crypto at an impasse. If a token is a security and can’t meet SEC requirements, which most probably can’t, it’s illegal. If it’s something else, which some probably are, it has no rules to follow. This makes operating a legal trading platform nearly impossible.

New rules are thus needed, both to keep crypto in line and to allow for whatever benefits it might eventually deliver. But what rules?

Stretching the existing definition of commodities to cover more digital tokens, as a new draft bill in the House seeks to do, isn’t a great solution. The legislation’s main criterion for identifying commodity tokens — whether governance is decentralized, with no controlling individual — would be extremely difficult to apply in practice. Worse, it would in effect reward issuers for having (or pretending to have) nobody in charge.

A better approach would be to create a blanket legal regime for trading in any instruments that don’t fall into existing categories, as well as Bitcoin and Ether (spot trading in which remains largely unregulated). Congress could task the SEC and the CFTC with jointly creating requirements for issuers and intermediaries, including disclosure, governance, safety, soundness and protection of customer assets. Alternatively, the agencies could delegate some or all of that responsibility to an industry-funded entity that they closely oversaw, on the model of the Financial Industry Regulatory Authority.

None of this requires regulators to make value judgments about crypto. Whether any good comes of it, and whether people get rich as a result, is a separate matter. But with the right rules in place, the chances of a desirable outcome will at least be much improved.

More From Bloomberg Opinion:

• The SEC Comes for Crypto: Matt Levine

• Binance and Coinbase Show Knives Out for Crypto: Lionel Laurent

• From Goldman to JPMorgan, Deals Have Dried Up: Paul J. Davies

The Editors are members of the Bloomberg Opinion editorial board.

©2023 Bloomberg L.P.