The SEC's Chair, Gary Gensler’s comments on cryptocurrency continue to make news and spark dialogue and debate, while his action against market players is loud and clear: “everything else other than Bitcoin is a security.” Initial shots fired.
Finally, the Commission has put its Crypto-as-a-Security stake in the ground – defining most digital assets, such as Ethereum, XRP, and other cryptocurrencies as securities under US law. This also means that they would be subject to SEC regulations and oversight, including registration and disclosure requirements, strict trading, reporting, and investor protection rules.
Specifically, the commission has labeled a number of tokens, yield products, and staking services as securities. It has also targeted trading platforms as unregistered exchanges, with Coinbase and Bittrex in its crosshairs for enforcement action.
Furthermore, the SEC has proposed several new rules, including one that would require investment firms to store their crypto assets outside of the industry. Another proposed rule, the “best execution” rule, would apply to any firm trading crypto security tokens.
With all of that said, we’re now seeing the SEC’s clarifying stance playout in real time – with added scrutiny and enforcement. The SEC is taking a more aggressive approach to regulating the cryptocurrency market, increasing their enforcement actions against issuers of digital assets considered securities and against exchanges that facilitate the trading of those assets.
Play By the Rules or Get Burned
Some players in our industry are not happy about the additional costs and regulatory “burdens” for issuing unregulated digital assets. But, let's face it, the lack of clear regulations has been a significant roadblock for institutional investors, who are hesitant to invest in a market perceived as unregulated and therefore risky. Without them, the digital economy has no chance of flourishing. The forest must burn for the regrowth to happen.
Those of us that saw this coming years ago, took the steps to work with the SEC – not against them – to build blockchain-based digital asset infrastructure and issue regulated tokenized assets with the long-game in mind. We don’t have to choose to fight, flight or flip. Instead, we chose to flourish.
Who’s in trouble, who’s not and who’s on watch?
Speaking of accountability, the SEC charged crypto exchange Bittrex with operating an unregistered national securities exchange, broker, and clearing agency. Before that, the commission charged two digital asset giants — Gemini Trust and Genesis Global Capital — with selling unregistered products. And, as previously mentioned, Coinbase, along with Crypto.com and others are staring down the barrel of the regulatory compliance gun.
While the SEC’s hammer has come down on various unregulated exchanges, which is obviously a warranted component of its enforcement regime, we’ve yet to see the commission go after token issuers with the same vigor with which they are targeting exchanges. However, for issuers, hoping the SEC doesn’t come to knock on your door is not a viable strategy. What are possible options for issues are the following:
- Flight: Issuers of crypto asset securities could decide that the U.S. and SEC compliance isn’t worth the trouble, therefore closing up shop here and heading overseas – exiting all U.S.-based exchange activity.
- Fight: The SEC isn’t the end-all, be-all for securities law – the courts are. Issuers could decide to take on the SEC in court and prove that they’re not securities. This is obviously the most costly and time-consuming option, but still a possibility.
- Flip: Issuers could go route where this is clearly all heading – register their token with the SEC and comply with U.S. securities regulation. It’s an extra step but worth every penny and minute spent in the end.
Regulatory clarity and consequences will only grow and strengthen the ecosystem
It's clear that the SEC is keeping a close eye on the cryptocurrency market and taking steps to protect investors. Whether you agree with their approach or not, one thing is for sure – the world of cryptocurrency is constantly evolving, and we can expect to see more changes and developments in the future.
So, with all of this enforcement going on, where does this leave the U.S. digital asset market? We argue that it’s exactly where it should’ve been all along – a diverse and robust ecosystem of responsible market participants that follow the decentralization doctrine, but respect that for the industry to flourish, it needs sensible guardrails. As I highlighted in a previous piece, we’re currently in the next stage of “Darwinism of the Digital Economy,” where the strong, smart (and regulated) survive to keep the DNA thriving.