We do the research, you get the alpha!
Speakers at Monday’s “Crypto Policy Symposium,” a gathering of cryptoskeptics, or “nocoiners,” dismissed the common calls for “regulatory clarity” from crypto proponents as a “distraction.” Regulations around crypto are perfectly clear, they said—and that’s why crypto enthusiasts don’t like them.
“An Oscar should go to whomever first coined ‘regulatory clarity,’” said Santa Clara University associate law professor Stephen Diamond.
In a panel entitled, “Are Regulators and Regulations fit to meet the Crypto Challenge?” Diamond said: “There is regulatory clarity—it’s fairly straightforward and it’s been in place for a long time. Hopefully there won’t be any dramatic shift to redefine this very stable understanding of financial markets.”
In contention was the ongoing spat between the Securities and Exchange Commission (SEC) and Coinbase, one of the world’s largest crypto exchanges. The SEC recently sued two former Coinbase employees for insider trading, and in doing so suggested several of the crypto tokens sold by Coinbase were securities.
Coinbase responded by attacking the SEC in a long blog post, following the tradition of other crypto companies, like Ripple and Kik, which have challenged the regulator in court. Among other things, Coinbase accused the regulator of stifling technology.
Fellow panelist John Stark, former chief of the SEC office of internet enforcement, said he had heard this claim before, and called it bogus. He went on to draw a comparison with the nineties, when he ran enforcement against early internet companies.
“There was lots of talk that we were ‘stifling technology’ then,” he said. “We weren’t stifling anything, we were getting bad actors out of the way so technology could flourish. Not so with crypto, because there’s no good in it. We’re stifling fraud, crime, chicanery and thievery.”
At the heart of much of the mutual mistrust between regulators and crypto companies is the debate over which regulatory body should have jurisdiction over crypto markets.
The SEC, for its part, is perfectly happy with its de facto position of authority, which it has wielded with great aplomb, enforcing hundreds of judgements against a litany of projects that it has deemed to be securities fraud.
Crypto lobbyists, on the other hand, have been agitating for that jurisdiction to shift to the Commodity Futures Trading Commission (CFTC), which would see cryptocurrencies treated more like commodities like gold, oil, or wool. Advocates of this approach argue that cryptocurrencies, which are often community-owned, may fall short of the narrow limits set by the century-old Howie test, which defines a security as an investment promising some kind of dividend on the back of a third party’s efforts.
The SEC has already intimated that Bitcoin is “sufficiently decentralized” and therefore not a security, but other coins remain in limbo.
Meanwhile, the regulatory agency has cracked down heavily on anything with a whiff of a securities violation, an approach that lobbyists—and even some regulators—view scornfully as “regulation by enforcement.”
The regulators themselves, however, laugh this criticism off.
“The Howie test is supposed to be broad,” said Diamond, pointing to the rule-of-thumb’s century-long pedigree and wide, diverse range of applications. He said that the majority of cryptocurrencies were obviously securities and that the industry should remain under SEC oversight.
On the subject of enforcement, Stark was similarly nonplussed, saying, “It’s not regulation by enforcement. It’s enforcement.”
The broadness of the Howie test and other SEC criteria, he added, was by design. “It’s really quite simple: you cannot lie, cheat, and steal in connection with people's money. That’s securities fraud.”
Stark added on the panel that the combative attitude taken towards regulators by crypto companies was not only a mistake, but self-defeating. “You don't fight with your regulator,” he said. “You could be put out of business overnight.”
He predicted that a new round of enforcement actions against crypto companies was imminent, and that the regulators were likely to get the department of justice involved. “The next wave are the exchanges,” Stark said. “They are going to get hit. Coinbase is going to get sued.”
Crypto companies “go online and call the SEC names,” he said. “They won’t call the DOJ (Department of Justice) names when they’re behind bars.”
These comments are not toothless: the speakers of the Crypto Policy Symposium have an audience in the uppermost echelons of power. Just before Diamond and Stark spoke, California Democrat Brad Sherman reaffirmed—by way of some circuitous and confusing comments about hamsters—his desire to see the crypto industry regulated into oblivion.