crypto strategy

SEC: Punishing Progress While Rewarding Confusion

The Securities and Exchange Commission (SEC) has doctored some high-profile, low-value enforcement actions, like the overhyped fine against Kim Kardashian. Regulators sometimes use headlines to send political messages and demonstrate their value to stakeholders. The agency has been on an enforcement tear later, eager to hit all crypto assets, even those that follow its rules. As SEC Chairman Gensler tells innovators to “come talk to us” to learn the rules, companies risk being hammered for doing something no one knew was wrong. Unfortunately, this blatant effort has deterred the innovations sought by investors. Look at Grayscale, Ripple, Robinhood and Coinbase.

The SEC should work with the industry to get it right

Sandra Hanna, head of Miller & Chevalier’s Securities Enforcement practice, which represents clients in SEC investigations and proceedings, observes that major players in the crypto industry have sought guidance and actionable regulation , But that was not the case. She explains:

“The SEC should, however, work with players trying to get it right before a substantial offer. In other contexts, market participants often engage with staff through a well-established process of “no action” letters. before engage in an activity. A no-action letter provides some assurance that if the advisor precisely what is presented to staff, the activity would not result in enforcement action.

“Well-established crypto participants try, in good faith, to engage with staff. For reasons none of us understand, this process is too slow and tedious and has yet to bear fruit. He has to go faster, that’s for sure.

Markets move at lightning speed; regulators, at a snail’s pace. There will never be meaningful clarity or protection unless the SEC does the minimum to publish rules in advance. This currently does not exist.

Grayscale: CFTC works for me, not for you

Grayscale Investments is the world’s largest digital currency asset manager with $15 billion in assets under management. It holds the tokens underlying the investment vehicle in “cold storage” or offline, making it easier for investors to buy, sell, store and hold digital assets outside of exchanges like the fraudulent FTX. While some crypto assets emerge specifically for arbitration regulation, Greyscale’s vehicles are bound by US financial rules and regulations, including US securities law, and are designed with compliance in mind. With compliance being an integral part of product development so to speak, Greyscale attempts to keep pace with, and even exceed, regulators’ expectations.

When Greyscale developed its Grayscale Bitcoin Trust (GBTC) into an exchange-traded fund (ETF), it followed SEC guidelines and instructions. Yet the SEC denied Grayscale’s request, denying the use of the Commodity Futures Trading Commission (CFTC) methodology it had previously recommended. The SEC later noted that its decision is consistent with all other spot bitcoin ETF applications it receives.

This Summer Grayscale for follow-up the SEC, asserting that the SEC’s inconsistent treatment of Grayscale’s products was arbitrary, discriminatory, and beyond the statutory authority of the Commission; he also argued that the test the SEC has applied to bitcoin-related ETFs, and only bitcoin-related ETFs, is flawed and has been inconsistently applied with “particular harshness” to spot bitcoin ETFs. Several amici memories support the Grayscale point of view.

“While bitcoin may be a relatively new asset, the legal issue here is simple,” says Grayscale. In 2021 and 2022, the SEC approved several Bitcoin futures ETFs, but repeatedly rejected ETFs that directly hold Bitcoin or track Bitcoin ETFs, including Grayscale’s request to convert GBTC. The filing points out that bitcoin futures and spot bitcoin both generate their price based on overlapping indices, so the spot price of bitcoin in each product is subject to the same risks and protections.

“This outright arbitrariness cannot be justified or reconciled with the Commission’s mandate to treat similar cases in the same way. Rather, it can only be understood as a substantive judgment on the merits of a bitcoin spot investment — the kind of substantive judgment that falls outside the authority of the Commission,” the brief states.

“The Administrative Procedure Act and the Exchange Act require rules and regulations to be applied without bias to one type of product or another,” said Craig Salm, chief legal officer of Grayscale. “Over 850,000 million Americans own GBTC – a product designed to provide investors with regulated access to investing in bitcoin.

Ripple: Regulation by application

A more egregious example is the SEC’s lawsuit against enterprise blockchain company Ripple over its use of the XRP token in its cross-border payment software product for banks. The legal theory at the heart of the SEC case is a microcosm of its sweeping argument that all crypto assets are securities. He argued from the outset that all XRP sales are contracts for investment in Ripple, even if they are sold on the secondary market by token users with no knowledge of the company’s existence. Ripple countered that XRP is a commodity on a decentralized ledger that anyone can use, own, or trade, and their efforts have little to do with its value or price.

The SEC’s arguments were so weak that Ripple’s lawyers quickly reversed the regulator’s situation in court and judged the SEC itself. By the end of the arguments after two years of litigation, an unprecedented number of amicus briefs had poured in against the SEC’s legal theory, including from more than 75,000 XRP holders the agency was supposed to protect. .

In the end, the Ripple case will likely have exposed the SEC regulation strategy by application as a flimsy attempt to expand its territory rather than as a concern for investor protection.

Bitcoin IRA: consumer protection through innovation, not regulation

Even in a world without regulation, markets are developing tools to address investor concerns about security, simplicity, and transparency, including cryptocurrencies. Crypto enthusiasts appreciate the decentralized and anonymous nature of digital assets, but these characteristics also enable fraud and therefore worry regulators. Innovators, however, see these issues as features, not bugs. They see a market opportunity to build the systems that provide these missing pieces to investors and regulators.

Bitcoin IRAis to help Americans retire with an investment platform and educational materials that make it easier to invest in cryptocurrencies. The platform features a customer-centric mobile app, 24/7 customer service with live humans, state-of-the-art multi-signature encryption technology, and cold storage (offline) wallets. External and independent rating agents also appear to provide the necessary information to the market. While this removes all risk from an investment, it helps investors make more informed decisions and balance risk within a given portfolio and strategy. This bottom-up innovation is important because it is customer-centric. Applications and platforms need to evolve with customer needs or customers won’t use them.

The SEC’s anti-crypto strategy threatens to undermine all digital asset companies, both legitimate and fraudulent. Its one-size-fits-all approach discourages progress by punishing the very innovations that meet investors’ wants and needs and bring value to the global economy, while sowing confusion that allows frauds like FTX to erupt unchecked. .

Disclosure: The author does not own or trade any digital assets. This article does not constitute an endorsement of any digital or cryptographic asset.

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