For the past five years, cryptocurrency entrepreneurs have been in fierce disagreement with US regulators over an existential question: whether certain digital assets are securities or investment contracts that must be registered with the Securities and Exchange. Commission. The stakes are high – if a cryptocurrency is deemed safe in a US court, it essentially dies in the US crypto ecosystem. Indeed, it cannot currently be traded on any cryptocurrency exchange, as none of them have a national stock exchange license.
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Two weeks ago, the SEC filed a lawsuit in federal court alleging that nine tokens available for trading on Coinbase were securities, and the executive order initially looked like a step toward more regulatory clarity. But the SEC did not explain what differentiates the tokens from other cryptocurrencies, and after the complaint was published, Coinbase published a blog post titled “Coinbase does not list securities. End of the story.” The episode was just the latest sign that the gap between industry and regulators has never been wider.
“The chairman of the SEC has publicly asserted that digital assets other than bitcoin are securities,” says Jai Massari, a former partner at law firm Davis Polk and now chief legal officer at blockchain startup Lightspark. Still, crypto firms have “necessarily taken the position that digital assets are generally not securities,” she says. It’s an amazing place for an industry, with nearly 100% disagreement between regulators and companies on one fundamental issue. “How this unfolds in the coming months will shape the future of much of the existing crypto industry,” Massari says.
So far, the SEC has stayed away from defining cryptocurrencies as securities, providing ambiguous guidance in public and private meetings with companies, according to securities lawyers. Forbes speak with. In his recent assertion that nine tokens listed on Coinbase are securities, he invoked a set of guidelines called Howey test to make his case. But the test is too vague and malleable to produce clear results, wrote Massari and Davis Polk partner Joe Hall. Meanwhile, the cryptocurrency industry has continued to move forward with the implicit belief that few digital assets are securities.
In January 2021, when President Biden selected Gary Gensler as the new SEC Chairman, many industry players pointed out that Gensler taught a course on blockchain at MIT and hoped it would provide more regulatory clarity on digital assets that are securities. But that didn’t happen, and that’s largely because of the political mire Gensler would find himself in if he did, says Joe Hall, who has been a Davis Polk partner for 23 years and works on the crypto regulation since 2013.
“When there’s a trillion dollar market, any SEC chairman should be aware that if they venture into it, it can be downright all-consuming and put them in the middle of a financial services food battle. traditional and crypto companies. These are the worst kinds of fights to fight,” he says. “You have vested interests on both sides. This can consume an incredible amount of time and resources… you have to face your overlords on Capitol Hill.
The “Pottery Barn Rule” – a principle that “you break it, you buy it” – also exacerbates the situation for regulators. If the SEC declares a certain cryptocurrency not a security, it is treated as an endorsement, the lawyers say. Later, if something goes wrong with the asset and consumers lose a lot of money, Gensler will be heavily criticized by congressional oversight committees and the media, according to Hall.
“It’s easy to criticize the SEC from the outside,” adds Hall. “But I know exactly why they do it. There is simply no benefit from an individual’s perspective in reaching out and trying to resolve the issue. It is much easier to sue people for breaking the law. A spokesperson for the SEC declined to comment for this article.
While crypto companies continue to operate despite the risk of enforcement actions from the SEC, Hall doesn’t think these companies are acting naively or that they think they can safely ignore what the SEC is doing. For better or for worse, they forge ahead despite risk and uncertainty. “If you weren’t prepared to live with regulatory uncertainty, there’s simply no way to operate in the business,” he says.
More recently, crypto companies have developed the financial strength and confidence to take on the SEC. In late June, crypto asset manager Grayscale sued the SEC for not allowing the firm to convert the Grayscale Bitcoin Investment Trust (GBTC), a bitcoin-based investment vehicle it launched in 2013. , into a cash bitcoin exchange-traded fund (ETF), which would make investing more accessible to the average US investor.
How will the fundamental disagreement between regulators and industry be resolved? “There’s no point in hoping that someone at the SEC or a change of the guard will cause the cavalry to come in,” Hall says. “We really need to look to Congress to solve it.”
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The Gap Between The Crypto Industry And Regulators Has Never Been Wider
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