The gap between the crypto industry and regulators has never been wider

For the past five years, cryptocurrency entrepreneurs have been at odds with US regulators over an existential question: whether certain digital assets are securities, or investment contracts that need to be registered with the Securities and Exchange Commission. The stakes are high – if a cryptocurrency is deemed a security in a US court, it basically dies in the US crypto ecosystem. This is because it cannot currently be traded on any cryptocurrency exchange, as none of them have a national securities exchange license.

Two weeks ago, the SEC filed a complaint in federal court stating that there were nine tokenized securities available for trading on Coinbase, and the decree initially seemed like a step toward greater regulatory clarity. But the SEC did not specify what makes the coin different from other cryptocurrencies, and after the complaint surfaced, Coinbase published a blog post titled, “Coinbase does not list securities. End of story.” The episode was just the latest sign that the gap between the industry and regulators has never been bigger.

“The chairman of the SEC has publicly stated that digital assets other than bitcoin are securities,” says Jay Massari, former partner at law firm Davis Polk and now chief legal officer at blockchain startup LightSpark. Assets are generally not securities,” she says. It’s an astonishing place for an industry with almost 100% disagreement between regulators and companies on a fundamental question. It will shape the foreseeable future of many. existing crypto industry,” says Massari.

According to securities lawyers, so far, the SEC has kept an arms-length distance from defining which cryptocurrencies are securities, providing vague guidance in public and private meetings with companies. Forbes talked to. In its recent claim that nine Coinbase-listed tokens are securities, it implemented a set of guidelines called howe test To give your reasoning. But the test is too vague and inflexible to produce clear results, wrote Massari and Davis Polk partner Joe Hall. At the same time, the cryptocurrency industry is moving forward with the implicit belief that some digital assets are securities.

In January 2021, when President Biden elected Gary Gensler as the new chairman of the SEC, many in the industry pointed out that Gensler had taught a blockchain course at MIT and was expected to provide more regulatory clarity on which digital Assets are securities. But that hasn’t happened, and it’s largely because of the political mess Gensler would find himself in if he did, says Joe Hall, who has been a Davis Polk partner for 23 years and has been working on crypto regulation since 2013. Huh.

“When there is a trillion-dollar market, what any SEC chairman needs to know is that if he enters it, it can be completely consumed and they will see a food fight between traditional financial services and crypto companies. They are the worst kind of fights,” he says. “You have vested interests on both sides. It can consume incredible time and resources… you have to deal with your overlord on Capitol Hill. Will happen.”

The “Pottery Barn Rules” – the principle of “you break it, you buy it” – also exacerbates the situation for regulators. If the SEC says a certain cryptocurrency is not a security, it is treated like an endorsement, lawyers say. Later, if something went wrong with the property and caused consumers to lose a lot of money, Gensler would be heavily criticized by congressional oversight committees and the media, according to Hall.

“It’s easy to criticize the SEC from the outside,” Hall says. “But I know exactly why they’re doing it. There’s no use sticking your neck out of a person’s point of view and actually trying to solve the problem. Enforcement against people who violate the laws It’s very easy to take action.” An SEC spokesperson declined to comment for this article.

As crypto companies continue to operate despite the risk of SEC enforcement actions, Hall does not think those businesses are acting naively, or that they can safely ignore the SEC. For better or worse, they are moving forward despite the risks and uncertainty. “If you weren’t prepared to live with regulatory uncertainty, you have no way of doing business in the business,” he says.

Recently, crypto companies have developed the financial strength and confidence to go face-to-face with the SEC. In late June, crypto asset manager Grayscale called on the SEC to convert the company into the Grayscale Bitcoin Investment Trust (GBTC), a bitcoin-based investment vehicle it issued in 2013, into a spot bitcoin exchange-traded fund (ETF). sued for failure to grant permission. ), which would make investing more accessible to the average American investor.

How will the fundamental disagreement between regulators and the industry be resolved? “There is no point in expecting that anyone in the SEC or the change in guard will result in a change in cavalry,” Hall says. “We really need to turn to Congress to solve this.”

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