As a seasoned observer of the financial world, I have seen my fair share of regulatory changes and evolutions over the years. In the case of cryptocurrencies and blockchain technology, the situation is unique and requires a balanced approach to ensure both innovation and investor protection.
It’s important to note that Gary Gensler, as the Chairman of the U.S. Securities and Exchange Commission (SEC), is often associated with the concept of “regulation through enforcement,” but it should be recognized that this approach was not exclusively his creation within the crypto sector.
Nevertheless, his tenure as SEC chairman will be defined by his assertive regulatory stance, which included numerous lawsuits against crypto and blockchain companies, yet was not accompanied by meaningful advisory actions such as no-action letters.
From my perspective as a researcher, it’s been announced that Gary Gensler is set to depart from the Securities and Exchange Commission (SEC) on January 20, coinciding with the transition of power in Washington D.C. This news has been eagerly anticipated by many within the crypto community.
Tyler Winklevoss recently stated that no apology could undo the harm Gensler has inflicted on the cryptocurrency market, as reported by CryptoMoon. In essence, Winklevoss claimed that Gensler has been enforcing regulations without much concern for those within the crypto industry.
A legal professional, preferring anonymity, shared with CryptoMoon: “Gensler’s efforts to claim sole jurisdiction over digital assets, as well as all blockchain offerings and trading activities, by declaring that all tokens are securities without clear guidance, has made the US market extremely challenging for companies working in the blockchain sector.
Meanwhile, some individuals not familiar with the world of cryptocurrencies viewed Gensler’s methods as being in line with the regulatory measures taken by U.S. authorities throughout the last 75 years, particularly when it concerned setting boundaries for new technologies.
Critics argue that despite this claim, during his term, the SEC significantly elevated Regulation through Enforcement (RTE), a more aggressive approach towards regulation. Additionally, it’s suggested that he was reluctant to clarify his stance and seemed intent on deliberately fostering uncertainty and doubt about the emerging industry’s fundamental technologies.
Gensler didn’t invent RBE
Indeed, it’s worth noting that the concept of regulation through enforcement isn’t exclusive to the SEC; this is a practice we’ve encountered before, as Carol Goforth, Clayton N. Little Professor of Law at the University of Arkansas (Fayetteville), shared with CryptoMoon.
As novel technologies arise, it can be challenging for regulatory bodies to keep pace, a point she made. Initially, they tend to apply current laws to these new technologies, such as the internet, digital currencies, or others.
“And the only way they can do that is typically by providing warnings of their intentions — which the SEC has certainly done — and then by initiating enforcement actions to prove that they mean what they have said.”
Prior to the 1960s, federal regulators primarily enforced rules rather than writing comprehensive regulations similar to those sought by the crypto industry, as noted by Todd Phillips, an assistant professor of legal studies at Georgia State University’s J. Mack Robinson College of Business in his conversation with CryptoMoon. Essentially, the SEC is continuing a long-standing practice in this regard.
It’s important to note that the Securities and Exchange Commission isn’t the only government agency to employ Recourse-Based Enforcement (RBE). For example, the U.S. Consumer Financial Protection Bureau has faced criticism for using this strategy when litigation is involved. This approach allows them to develop or experiment with innovative legal theories and frameworks that might have been created or regulated through legislative or administrative rulemaking processes instead.
What’s different here?
Although regulatory enforcement has been a part of the U.S. system for a long time and other agencies besides the SEC have utilized it, this doesn’t automatically justify Gensler’s actions. While he may not be the creator of Regulatory By Enforcement (RBE), there are concerns that he might have misused or overextended it, as some argue.
Karen Ubell, a partner at Goodwin’s technology group and co-chair of their digital currency and blockchain practice, explained to CryptoMoon that regulatory agencies often use enforcement as a tool. However, she pointed out a concern with the SEC’s method – they seemed to rely solely on this one tool.
“That tool was a sledgehammer designed not just to block progress in the industry, but also used to do a job that actually requires something much more tailored.”
According to Goforth, the Regulatory Framework for Blockchain and Cryptocurrencies (RBE) has not been effective in bringing clarity to the sector. There seems to be a gap or misunderstanding between the SEC’s interpretation of what is clear, and how others perceive crypto assets.
Ubell stated that since businesses haven’t found a definite route for adherence and there’s ongoing debate in courts about applying current laws and guidelines to cryptocurrencies, it seems creating fresh rules or regulations could be the best course of action.
Lawsuits will continue even with Gensler gone
As a crypto investor, I understand the perspective that the SEC was left with little choice in its recent actions. However, it’s crucial to note that the SEC, as per Phillips, lacks the legal power to establish regulations defining which digital assets fall under securities law and which do not. This means they can’t arbitrarily classify crypto assets as either securities or non-securities.
“If the SEC thinks that some crypto assets are securities that are being sold illegally, its only option is to bring enforcement actions like it’s been doing.”
Instead of saying “Phillips diverges with those in the cryptoverse who claim that Gensler has brought a ‘reign of terror’ against the industry,” you could paraphrase it as “Phillips disagrees with the perspective within the cryptocurrency community that Gensler is waging a harsh campaign against the sector. Instead, he argues that the SEC is implementing focused enforcement actions under securities laws, which is its mandate from Congress.
As a researcher, I find it plausible that if the Securities and Exchange Commission (SEC) had not initiated these lawsuits, private entities would have taken up the mantle. It appears that numerous legal actions against crypto asset purchasers claiming tokens were securities are ongoing, with the possibility of these proceedings persisting long after Gensler’s tenure ends.
As a crypto investor, I acknowledge that private entities may initiate legal actions regardless of the SEC’s involvement. This is particularly true in cases involving fraud, market manipulation, or other forms of misbehavior associated with a specific cryptocurrency or platform.
“But that would be a more even playing field than having to defend against a regulator that has essentially unlimited assets that it has often brought against small or already failing or failed businesses.”
Nonetheless, Stephen Diamond, a law professor at Santa Clara University, did not concur with the notion that the classification of a transaction as a security under federal law is questionable due to the 1946 Howey court ruling. Instead, he found no issues with this determination according to the decision made by the Supreme Court in 1946.
Howey offers a “straightforward, uncomplicated, easily understood” litmus test that remains pertinent and beneficial – even amidst the era of cryptocurrencies and blockchain technology, as he explained to CryptoMoon.
Indeed, he denies that regulation by enforcement exists, calling RBE “a myth.” What Gensler has done is simply enforcement, applying the Howey test to the crypto assets sector — and for doing that the crypto industry has “targeted him unfairly, abused him.”
According to Diamond, Gensler’s performance as the SEC chair has been nothing short of exceptional, aligning closely with a 75-year tradition of U.S. securities enforcement practices.
Ubell contends that, under Gensler’s leadership, the SEC has failed to offer clear regulations for a novel financial sector, despite numerous legal actions.
“The only other guidance provided by the SEC was statements from Gensler and his predecessor along the lines that every token is a security when in reality tokens can represent almost anything and to make such a broad, all-encompassing statement about a category of wide-ranging assets requires a more nuanced analysis and left far too much to interpretation.”
Instead of enforcing actions, the agency could have opted for alternative strategies such as sending no-action letters, offering compliance and disclosure interpretations, writing internal legal bulletins, submitting additional 21A Reports, or employing other tools that the SEC staff frequently uses to offer guidance on complex and intricate matters.
Should the US follow MiCA’s lead?
As a researcher in this field, I firmly believe that it would be advantageous for all parties involved if the United States were to establish rules and regulations for the crypto and blockchain markets, similar to the MiCA process implemented by the European Union. By doing so, we could potentially avoid some of the pitfalls experienced by Europe, where they’ve historically relied on a regulation-by-enforcement approach. This proactive measure could foster trust, transparency, and security within these dynamic markets, ultimately benefiting all participants.
In Europe, the emphasis has been more on establishing comprehensive regulatory structures, like the Markets in Crypto-Assets Regulation (MiCA), compared to primarily enforcing compliance through action. This is according to Annabelle Rau, an attorney at McDermott Will and Emery based in Germany, speaking with CryptoMoon.
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Goforth expressed his hope that there will be fair oversight of cryptocurrency transactions in the near future. He believes essential information should be provided before crypto assets can be traded, but regulation should avoid discouraging businesses from operating in the US or denying Americans the freedom to choose their own investment options.
The crypto industry would like to see legislation along the lines of FIT21, or even a comprehensive regime under the oversight of the Commodity Futures Trading Commission, said Phillips, adding “while many progressives want to just give everything to the SEC.” All this will have to be sorted out.
Phillips stated, “It’s necessary for some action. If Congress fails to tackle how securities regulations apply to cryptocurrencies, the courts might take over. This is not a desirable scenario where the courts make a final decision on this matter.” He further explained, “We all prefer a situation where this issue isn’t decided by the courts once and for all.
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2024-11-26 17:45