Does cryptocurrency need new regulatory disclosure mandates from Washington, D.C., to be of service to consumers? No, but that is what Securities and Exchange Commission (SEC) Chairman Gary Gensler is seeking.
As stated in a speech on Aug. 3, Gensler indicated he wants to double down on the same tried-and-failed approach his predecessor used. From disclosure-heavy mandates to investor-protection obsession, everything he has proposed is a regulatory version of insanity – doing the same things but expecting different results.
Under the guise of technology neutrality, Gensler seeks to force the crypto industry to heel to the SEC. As he stated, “I think former SEC Chairman Jay Clayton said it well when he testified in 2018: 'To the extent that digital assets like [initial coin offerings, or ICOs] are securities – and I believe every ICO I have seen is a security – we have jurisdiction, and our federal securities laws apply.'”
Indeed, one would be hard pressed to find a crypto innovation over which he doesn’t want to exert control. Stablecoins? Check. Exchanges? Check. Decentralized finance (DeFi)? Check.
That hasn't gone well so far.
By any account, the commission’s crypto policy has been a mess. Former Chairman Clayton seemed perpetually perplexed by such new technologies, finally appointing a crypto “Czar” – career bureaucrat Valerie Szczepanik – in 2018. A year later she and Corporation Finance Director William Hinman produced a widely panned 13-page crypto “framework.” The document was so impenetrable, SEC Commissioner Hester Peirce compared it to a highly abstract Jackson Pollock painting.
The other major Clayton-era guidance came from a 2018 speech where Hinman declared ether, the currency for the second-biggest crypto blockchain, Ethereum, was not a security. The crypto world cheered. But in the closely watched Ripple litigation, the commission has now disavowed that finding.
Other than these two instances, SEC "guidance" has largely come not from official rulemaking but from punitive subpoenas and court appearances.
But even if the commission was less scattershot, it’s not clear forcing the nascent industry into a Depression-era disclosure regime would protect those retail investors Gensler has in mind.
A review of recent press releases reveals multiple enforcement cases against alleged fraudsters that were already beholden to commission mandates. Empirical studies have repeatedly shown the federal disclosure regime does more to employ myriad compliance professionals than stop scam artists.
It is also telling that the least regulated way issuers can raise capital – Regulation D 506(b) (Reg D), which mandates no disclosures – is also the most successful. In 2019, it raised $1.5 trillion and outpaced the public markets, an impossibility if investors feared widespread fraud.
Too bad that securities law paternalistically blocks most investors from Reg D opportunities. Only 13% of potential investors qualify because financial and sophistication thresholds limit eligibility. And they tend to cluster in America’s elite zip codes, meaning the best deals go to people who need them least.
Retail investors are mostly left with post-IPO scraps. As Georgia School of Law professor Usha Rodrigues states, “Securities law ... in theory, as in practice, marginalizes the average investor without acknowledging that it does so, let alone justifying it.”
Under Gensler’s crypto leadership, this financial marginalization will continue to block opportunities for wealth creation where they are greatest (perhaps in all of history).
Instead, Gensler should change course and approach crypto with a measure of humility and cooperation. This would include:
- Ditch the 2019 framework
- Acknowledge the commission’s role in creating the uncertainty surrounding crypto’s security status
- Ask Congress to update the definition of security to clearly define what digital assets fall under the commission’s ambit and which do not
- Drop all prosecutions against non-fraudulent crypto issuers and impose a moratorium against further prosecutions until Congress updates its definitions
- Direct all crypto prosecutions against alleged fraudsters
SEC regulators should want to give honest innovators certainty and breathing space. A more circumspect approach would also put major crypto policy questions back to Congress to decide and allow everyday Americans to explore the ingenuity crypto has to offer. And it may make the SEC less insane.
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