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Counterpoint: Is the SEC Right About Crypto?
With the implosian of FTX, collapse of Silvergate and many other crypto entities over the last 12 months it should come as no surprise that the SEC is once again talking about what to do with cryptocurrency. Gary Gensler, the current chair of the SEC, had mentioned last year that proof-of-stake tokens could fall under the realm of securities.
What is the SEC’s relationship with cryptocurrency? Is the SEC the right choice to regulate crypto? All this and more, answered below.
How We Got Here: The SEC and Crypto
It’s no secret that the SEC has had some dramatic interactions with cryptocurrency in the past. In 2022 alone there was great speculation across the cryptocurrency community when SEC chair, Gary Gensler, said that cryptocurrency exchanges were operating outside of the law and may be subject to enforcement.
The discussion around whether or not cryptocurrencies are securities has been a topic of much debate. Classifying a cryptocurrency as a security would bring that crypto under the oversight of the SEC. Part of the brand of cryptocurrency is the lack of government oversight and non-regulation, so you can see how these ideas conflict.
This change would also create a lot of restrictions on what is currently possible with the use of cryptocurrencies. Smaller exchanges would be cut out of the market and only larger exchanges that could afford to take steps to get the appropriate licensing to operate would be among the biggest changes. On the other hand, this would come with some institutional scale benefits, the security that insurance provides, and with government oversight comes accountability, something more than a few investors value.
Leaving cryptocurrency unregulated, is more in-line with the cryptocurrency ideology. Bitcoin launched in 2009, hot off the heels of the great recession. Bitcoin’s founder, Satoshi Nakamoto created the cryptocurrency in order to provide an alternative to the debatably corrupt financial situation present on Wall Street. So long as cryptocurrency remains unregulated, this leaves open a financial wild west where users are free to invest, trade, and so on, without state oversight.
The Case For Security Classification
To speculate a bit deeper into the topic, classification as a security would come with certain benefits, albeit at the risk of becoming a less inclusive institution, making starting up a crypto exchange more difficult, expensive, and with more strings attached. Perhaps more importantly, those strings come from the government, something that more radical cryptocurrency fans are avoidant of. However, in spite of all of this, regulation by the SEC comes with a number of potential advantages. Legitimacy, investor protection, confidence, trust, and institutional backing.
With SEC regulation, this would likely also come with regulators policing what coins are allowed to startup, preventing the development of gimmickey meme coins like SHIB for example. Meme tokens are more speculative than other crypto assets like ETH which support a large network of applications and other services. Without a strong use-case and plan to undertake the burdens of SEC compliance, it would not be likely that the SEC would allow that asset to be traded and developers would be facing legal penalties.
As well, with SEC regulation comes transparency. This is something of a double-edged sword for certain currencies, such as Monero, which function off of a basis of privacy in the first place. However, for any cryptocurrency with an open ledger, this wouldn’t be a great problem since the currency is already designed to be transparent. Open-ledger cryptocurrencies could find themselves in the good books of the SEC.
The Case Against
As previously mentioned, SEC regulation is something that goes against the grain of the grassroots ideology of the cryptocurrency community. However, there is more to it than that. There are also financial concerns surrounding the case against SEC regulation that may be pertinent to consider before jumping head first into a pro-institutional position. Namely, assuming the burden of SEC regulation comes at quite a cost and comes with hiring licensed experts and lawyers to consult on development and record and implement regulatory information and recommendations. Bureaucracy of any kind, rarely comes cheap. SEC transparency might be a boon to some, but a concern for others. With transparency, comes fewer opportunities to evade what some may consider a censoring government, something cryptocurrency fans living with authoritarian leadership have a concern about.
Cryptocurrency is money for everybody, and SEC regulations might change the nature of how small-scale, mom-and-pop investors make investments in cryptocurrency. SEC regulation would make cryptocurrency a pricier investment, cutting out regular people and supporting it more as an institutional financial tool reserved for a wealthier customer. Some proponents against SEC regulation, support bringing cryptocurrency under the authority of the CFTC, the Commodities and Futures Trading Commission. Before the scandal with FTX happened, Sam Bankman supported the idea of bringing cryptocurrency under the thumb of the CFTC, however there are more credible voices supporting similar ideas.
The Crypto Council for Innovation, a think tank which includes industry partners such as Coinbase, has called for a regulatory framework that would involve conversations with those involved in the cryptocurrency community that defies the boundaries of existing rulesets. The hope of the CCI is that any regulatory framework for the world of cryptocurrency has to make sense for cryptocurrency, rather than becoming a “turf far” between already-existing departments.
Conclusion
In conclusion, there are strong cases both for and against SEC regulation. In the case for regulation, transparency and investor protection offer institutional investors the confidence and accountability that they need to bring cryptocurrency onto their platform. As well, this would come with stronger policing of the development of gimmickey cryptocurrencies which are prone to rug-pulling and other financial manipulations. However, this would come with the consequence of less inclusivity for new and small scale investors.
In the case against SEC regulation, the SEC might not even be the appropriate authority to regulate cryptocurrency. The CFTC might be more appropriate, or better yet, a separate department created with consultation of cryptocurrency-focused businesses.
