“Our rules must evolve”: the cryptocurrency industry is trapped in regulatory purgatory

Many in the cryptocurrency industry have asked for clear guidance from government regulators, especially as new industries like DeFi evolve and high-profile companies like Celsius collapse.

“As markets have evolved, our rules must also evolve,” said US Securities and Exchange Commission Chairman Gary Gensler, speaking of his approach to financial regulation before the Senate Committee on Banking, Construction. housing and urban affairs Thursday.

While Gensler’s remarks in the Senate seemed to indicate a modernization, he said the existing rules are sufficient for cryptocurrencies, especially when it comes to determining whether the vast majority of the nearly 10,000 available tokens are securities.

“Nothing in the cryptocurrency markets is incompatible with securities laws,” he said on September 8 in a speech to the Practicing Law Institute.

As several agencies and departments recognize the growing influence of cryptocurrencies, intergovernmental gaming and a lack of clear regulation are sowing confusion among businesses and investors, legal and compliance experts said. Fortune. Even with the White House and the Treasury Department releasing paintings and relationships On Friday on the development of digital assets, experts say there has been little practical progress.

“There has been a very steep learning curve on digital asset technology and traditional regulators have really had a tough time,” said Tracy Angulo, director of financial services at consulting firm Guidehouse. “Each agency took their own perspective on this, and there was no cohesion.”

‘Tell us why’

One of the main regulatory debates is which US agency should oversee various cryptographic tools. Much of this hinges on whether a particular cryptocurrency or token is a security under the Securities Act, said Daniel Davis, partner of the Katten law firm and former general counsel at the Commodity Futures Trading Commission.

If a cryptocurrency or token is a security, the jurisdiction would belong to the SEC, otherwise to the CTFC, with some exceptions.

The distinction goes back to a 1940s Supreme Court case that established the Howey Test, which determines whether a contract or transaction is subject to securities law.

Something qualifies as an “investment contract” if there is an expectation that the profit on an investment will come from the efforts of others. As Davis explained, a classic example is the purchase of stock in a company. That money will be combined with money from other stock sales and the board of directors and senior officials of the company will try to direct those funds towards increasing the value of the shares.

In this test, the two largest cryptocurrencies by market cap, Bitcoin and Ether, are likely not stocks because there is no centralized group working to create additional returns. Similarly, if someone buys a digital asset trying to access a particular blockchain, then it can be thought of as a kind of arcade token with a consumer use, rather than an investment tool.

Although Bitcoin and Ether have generally been considered commodities rather than stocks, and therefore regulated by the CFTC, Gensler has taken a more aggressive approach towards the rest of the market. As he reiterated before the Senate, “Of the nearly 10,000 tokens in the cryptocurrency market, I believe the vast majority are stocks.”

Industry lawyers like Davis have said they are still seeking clarification rather than what they have described as ad hoc statements that do not necessarily represent actual policy. For example, Davis said he wanted more insight into the small number of tokens that Gensler consistently describes as non-stocks.

“It would be great for the cryptocurrency industry if [he] it would tell us why, ”Davis said Fortune. “It would give some more specific and concrete notions of what is and is not a security”.

This uncertainty only escalated after Gensler’s testimony on Thursday, when he told reporters that the new staking system implemented in the Ethereum merger last week could fall under the rules of the headlines.

Additionally, Gensler said that since most tokens are securities, it means that crypto intermediaries, such as exchanges, are transacting in securities and should register with the SEC. This, in turn, may require them to split their various services, such as brokerage operations and custody functions, into separate legal entities.

Jonathan Shapiro, a partner at Goodwin law firm, said SEC registration creates new challenges for companies and investors, especially since no explicit guidance has been provided. “There is no way to necessarily be certain that even if you are solving a series of exposures, you will not be the lamb to the slaughter under any number of other spheres,” he said. Fortune.


Nick Losurdo, a partner of Goodwin and former legal counsel to the SEC, described the agency’s approach as “a broad toothbrush without following any articulation.”

“We all learned in fourth and fifth grade, you can’t just show your math conclusions, you have to show math,” he said.

While Gensler continues to argue that existing laws are sufficient, many industry lawyers say more clarification is essential, especially as Gensler argues in favor of updating other rules.

“It certainly looks like the SEC, given the [amount] of the rules they have made over the past year, they certainly seem to have no hesitation in reaching the rules bucket when they want to explore and address a problem, ”added Davis, the former CFTC attorney.

In a recent interview with CoinDesk, Gensler pointed to two 2017 SEC cases where tokens are stocks.

Amy Jane Longo, a partner at Ropes & Gray law firm, said the resolved cases do not offer much clarity, as they are not contested with potential defenses and lines of discussion. “What we really end up with is a mosaic of joints,” she said Fortune.

Shapiro said this is compounded by the fact that the SEC acts as both a police officer and a regulatory agency. Consequently, it is more pragmatic for defendants to settle instead of going to trial. One notable exception is payment services firm Ripple, which has decided to challenge the SEC’s allegation of raising money through an offer of unregistered XRP digital asset securities. The case is ongoing.

“It is easier to initiate law enforcement than to engage in rule making,” Davis said. “Despite that, there are huge benefits in developing rules and giving the public a better idea of ​​what the rules of the road are.”

Beyond the SEC

The SEC, of ​​course, isn’t the only government body that could oversee cryptocurrencies. There are several proposals floating around in Congress, including a bipartisan proposal from early August that would give Bitcoin and Ether regulatory authority to the CFTC, which many consider more industry-friendly than the SEC.

Friday’s flurry of activity by the White House and the Treasury Department, spurred by President Joe Biden’s March 9 executive order for further research into digital assets, simply didn’t add much clarity, experts say.

The White House guidelines encouraged both the SEC and the CFTC to “aggressively pursue investigations and law enforcement”, as well as “issue guidelines and address current and emerging risks in the digital asset ecosystem,” although did not distinguish the responsibilities between the two agencies.

Similarly, the Treasury report titled “Crypto Assets: Implications for Consumers, Investors and Businesses” pleaded with US regulatory and law enforcement agencies to “aggressively pursue investigations” and “issue guidelines. and supervisory rules “.

Losurdo described the White House leadership as “some kind of cheap burger,” adding that Congress should step up.

Angulo said the agencies are likely negotiating behind the scenes to figure out where the regulator is. Meanwhile, there appears to be a heightened spat among agencies, such as a July CTFC statement describing a SEC case related to cryptocurrencies as “regulation by enforcement” and calling for more transparency, adding that “regulatory clarity comes from being out of business. open, not in the dark “.


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