After having served as the first head of the Cryptographic Unit of the SEC from 2017 to 2019, they often ask me what type of cryptocurrency application we should expect to see from the new administration. My first answer is that I don’t know. My second answer is that I think it will be different, but it will not disappear.
To anticipate the future of the application of cryptography, we must begin by reviewing the past.
The beginning
The Cryptocurrency Compliance Unit of the SEC was formed in 2017 during the first Trump administration. The initial approach was in one, fraud and two, the central capital of capital collection. Capital elevation regulation is the main purpose of the 1933 Securities Law. When an investor gives money to an entrepreneur who will use it in a business to generate profits, the investor has the right to certain information about the business. The first cryptographic investigations focused on this fundraising activity, which was generally in the form of an initial initial currency offer (“ICO”). The idea was that many ICO at that time were not so different in substance that capital or debt offers should be regulated in a similar way.
The industry responded responsible and now, cryptographic entrepreneurs often collect money in accordance with federal values of values. In one of several options, some offers are exempt from the sec registration because they are limited to accredited investors. Then, entrepreneurs use the capital to build a blockchain protocol or other cryptographic product. Once built, tokens sales are probably not offers of values because people are not buying tokens as an investment in someone’s business. Even if there is hope to obtain profits, that gain will come from the activities of buyers and other participants, not from the efforts of a central commercial manager.
The last four years
During the last four years, the SEC has focused more on its compliance activity on secondary markets, such as centralized trade platforms and decentralized protocols. It is less clear how federal laws of values apply to these markets. These transactions generally do not involve a central entrepreneur who collects money from investors and uses it in a business. Instead, there are thousands or even millions of cryptographic participants who interact with each other, sometimes anonymously through autonomous software. It is possible that tokens buyers do not know who sold them and there may not be a central actor that is key to future success. The federal district courts have reached different conclusions and there are reports that the SEC could eliminate one of these key cases.
In more general terms, the application became the dominant focus of the SEC regulation. The SEC doubled the size of the cryptographic unit, creating new supervision positions and litigating lawyer. He spent years and a tremendous amount of resources that litigate several cases that are not fraud. Many additional lawyers without units worked in cryptography investigations, and cryptography seemed to be the main focus of the application of the SEC.
This approach did not generate useful guidance for the industry. Many SEC rules have technical aspects that are incompatible with the anonymous decentralized main book that is Blockchain technology. Under the application approach in recent years, the premise of technology was treated not as a characteristic, but as an error. The result was the risk of existential application for a flourishing industry and an economic activity that were pushed into the high seas.
The future
I do not believe that the cryptographic industry wants a wild west without regulation. They want a sensible rules book that makes compliance possible, and they also want regulators to take energetic measures against fraud. No legitimate actor benefits from industry fraud.
What does this mean for the next four years of application?
First, the application is just a component of regulation. We will probably see an increase in resources dedicated to other parts of the effective regulation: new orientations and rules that offer an attainable regulatory framework. The interim president of the SEC, Mark Uyeda, recently announced a new cryptographic working group to develop a “sensible regulatory path”, and Commissioner Hester Peirce, who will direct the workforce, included in its objectives “preserve[ing] The industry’s capacity to offer products and services. “The dedicated cryptographic unit has also been reduced in size and reused to cyber and emerging technologies, and many employees return to general compliance tasks.
Second, we could see a renewed approach in fighting fraud. The Commission did not stop bringing cases of cryptographic fraud during the last four years, but many cases of holders were regulatory disputes without fraud. That could change; As Commissioner Peirce said in his goal speech: “We do not tolerate liars, cheats and scammers.”
Thirdly, once there is a new rules book, we can expect the SEC to enforce those rules. That will take time. We could see a transition period, with some cases of non -fraud, but more focused on writing the new rules book. Once adopted, the application of that rules book could come after a fair warning period for the industry to adapt to it.
Conclusion
I hope that the application of the SEC cryptographic continues, but with different priorities. The protection of investors will be balanced with the coefficient mandates of the SEC of facilitating capital formation and maintaining the ordered markets. The cryptographic industry is full of good actors who want to meet; They only need a rules book that makes compliance can be achieved. A renewed approach will allow the industry to grow without abandoning investor protection.
The SEC has been the most assertive cryptographic regulator so far, but it is not alone. Other federal agencies may arise as co-ado regulatory leaders, either through legislation or otherwise, especially if the SEC no longer takes the position that each cryptocurrency (except Bitcoin) is a security. Some state authorities have been active in cryptography, and that will probably continue or even increase.
A client recently reminded me that there will be another choice in four years. The new regulatory approach, and commercial decisions and products of the industry must be lasting. If they are not, the renewed focus of cryptography in the next four years could get rid of as easily as that of the last four years.
