It’s 2023, Not 2019: The SEC Needs to Get With the Times
The SEC does have a 2019 framework for regulating digital assets, but it’s so out of date, it’s essentially worthless
Stokkete/Shutterstock modified by Blockworks
When it comes to complying with US rules and regulations, SEC Chair Gary Gensler says the rules are “clear.”
You might agree if your definition of clear is similar to the middle of a mud pie.
While the SEC under Gensler has refused to issue crypto-specific rules guidance, his predecessor did at least try to begin laying out some principles on specific aspects of crypto assets in a 2019 document, “Framework for Investment Contract Analysis of Digital Assets.”
That document is not a formal rule. But given the paucity of clear crypto guidance from the current SEC, it’s worth examining to judge its worth and, if that’s missing, what the SEC should instead provide market participants with today.
Four years in crypto is a lifetime, and the 2019 document might as well be an Edsel when the market really needs a Tesla. While useful at the time, that document focuses intently on initial coin offerings (ICOs), which have become extinct and are unlikely to be revived.
An ICO allows the backer of a new token to raise capital in exchange for tokens. The SEC’s 2019 document clearly comes down on the side of believing ICOs represent a securities transaction. Even legal scholars who disagree with the current SEC’s approach to crypto policy agree that raising capital in exchange for tokens is a securities transaction.
The problem for market participants seeking clarity is that ICOs have gone the way of the dinosaur. They are merely one aspect of crypto, and the SEC’s 2019 framework only speaks to whether the process of offering tokens in exchange for capital represents a security — not whether the underlying asset is itself a security.
This is why the SEC owes market participants more precise answers on a framework for crypto assets, and why Coinbase was compelled to sue the SEC to force them to provide that guidance.
Gensler’s pablum about the law being “clear” simply doesn’t align with the facts.
The complexity of this topic and the problematic nature of the SEC’s lack of clarity was recently explored by DLX Law in a paper entitled “The Ineluctable Modality of a Securities Law.” In it, the authors go under the hood of crypto assets and reveal that the debate over whether an ICO represented a securities transaction obscured a more critical discussion about whether the underlying asset is also a security, particularly in secondary transactions such as the ones that Coinbase and other crypto exchanges engage in.
The paper’s authors persuasively argue that contrary to the SEC’s self-assured claims, whether an underlying crypto asset is a security doesn’t have an answer in current law. Getting that answer requires action by Congress or a novel regulatory framework tenuously relying on existing policy.
The federal government has given crypto market participants neither. Instead, they have embarked on a regulation-by-enforcement campaign, which some legal experts have said is legally dubious when used as a first and not a last resort.
A market that has moved beyond ICOs (the crux of the 2019 document) might wonder why the SEC has stubbornly refused to issue guidance and even asserted that none is needed.
In answering that question, one must look back at the DLX Law paper and its assertion that current law doesn’t speak to the unique nature of crypto assets. One can infer that the SEC also knows this, but it has decided that it doesn’t like the framework that Congress is likely to come up with and will therefore pursue regulation through enforcement until the courts stop them.
While the SEC is engaged in an end-run around the political process, other countries have leaped at the opportunity to bring crypto innovation to their shores and within their regulatory perimeter. France is welcoming crypto market participants, while Hong Kong prepares to accept applications for crypto trade platforms, and the Europe Union celebrates the passage of MiCA.
Without action in Congress or more rational leadership at the SEC, market participants will be left with a stale document from 2019 and regulatory muddy waters — not the clear skies that the SEC claims exist.
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