SEC’s regulatory approach stifles innovation and may send crypto overseas
“Come in and talk to us.
Gary Gensler, Chairman of the Securities and Exchange Commission, urges crypto companies to stop, sit down, and be proactive in understanding how securities laws apply to the operations of their entities.
However, rather than providing helpful guidance to entities trying to “come in and talk,” the SEC is beginning to investigate, serve subpoenas and, in the coinbase case, are threatening legal action after Coinbase tried to proactively engage with the commission. In recent months, the SEC has intensified its “regulation by enforcement” strategy – despite publicly denying the practice – which threatens the lead of the United States in the global race to capitalize on the digital asset economy.
Two recent actions illustrate the SEC’s hostile approach. In July, the SEC filed a enforcement measure against a former Coinbase employee and two others for alleged insider trading. And in a more recent move, the SEC is now apparently investigating whether Coinbase allows non-registered securities to be traded on its platform.
Besides the focus on Coinbase in particular, the two actions exemplify the SEC’s approach to digital asset regulation through enforcement rather than regulation or knowledgeable advice where the American people have a say. . Indeed, the industry is forced to manage compliance by reading between the lines of SEC enforcement filings, whether they are complaints filed in court or settlement agreements posted on its website. These aren’t the actions of a pro-innovation agency cultivating good relationships with an industry it supposedly wants to “come in and talk about.”
As the widespread adoption and importance of cryptocurrencies continues to grow, there is broad consensus among policymakers and industry stakeholders that clear and responsive regulations are long overdue. Leading figures in the crypto ecosystem have long called for a more defined regulatory framework to guide their work, but the recent approach by SEC leadership poses a serious threat to national innovation in this space.
Rather than working alongside Congress and other agencies like the Commodity Futures Trading Commission to unite around a unified approach to crypto regulation, the SEC has taken an opposite approach: working to slow down the industry. and stifle innovation. Even SEC Commissioner Hester Peirce expressed his opposition the SEC to increase its resources and staff to focus on law enforcement.
Unlike Congress, the CFTC, and the millions of people who own and use cryptocurrencies, the SEC seems to adamantly view these assets as securities rather than commodities, while not specifying why. Naturally, the SEC would be forced to drop its oversight of crypto if the assets are considered commodities, suggesting a rigid bias behind its beliefs that is not rooted in any legitimate legal basis, but rather a tortured interpretation of a more than 70-year-old Supreme Court precedent.
What could the SEC do if it really wanted to work cohesively with the industry rather than punish it? For starters, it could provide updated guidance on the application of the Howey test, the standard for determining whether an asset constitutes an investment contract, and therefore a security. Rather than leading the conversation on acceptable securities classification standards designed for the age of digital assets, the SEC has remained silent since its last guidance in April 2019 and has left entrepreneurs and developers swimming in murky waters.
It’s Clear: Crypto Market Players want to comply, but the SEC has failed in its responsibility to explain how they can do so. The SEC was established protect investors, support efficient markets and facilitate capital formation. The agency’s approach to crypto goes against that mission.
Merely indicating that the “vast majority” of tokens in the crypto market are securities is far from sufficient. The agency’s lack of clarity has made it nearly impossible to assess compliance with federal securities laws, hurting investors and creating ongoing confusion and uncertainty in the markets. The SEC’s regulation-by-enforcement approach also stifles capital formation by inhibiting innovation through fear of enforcement.
If regulatory clarity and certainty didn’t support fair, orderly, and efficient markets and facilitate capital formation, I don’t know what would.
And I’m not the only one to be of this opinion. As Commissioner CFTC Pham wrote in response to the SEC’s recent insider trading enforcement action, “[m]Major issues are best addressed through a transparent process that engages the public in developing appropriate policy with input from experts. … Regulatory clarity comes from being out in the open, not in the dark.” If the SEC continues on this counterproductive path, the United States risks ceding our advantage in technological innovation. and send this fledgling industry overseas.
Regulation should be spurred by congressional debate and legislation — not the enforcement decisions of a single independent agency. Fortunately, members of Congress and other policy makers have realized the opportunity that crypto presents to the United States and are working hard to craft sensible legislation that will push the technology forward. The SEC is the outlier, married to an outdated perspective on enforcement, which, if continued, will ensure that the future of crypto thrives outside of the US.
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