Where is the “regulation by enforcement” path taking us?
Each week, we hear about the latest SEC enforcement action. This week, the SEC and CFTC jointly filed charges against XBT (otherwise known as First Global Credit) alleging that the company sold security-based swaps for bitcoin without registering as a futures commission merchant. This follows the recent high-profile actions against Telegram and Block.one, which we analyzed last month. And of course, there are the SEC’s continued rejection of every bitcoin ETF proposal submitted for consideration.
As we at BitOoda engage every day across the different verticals that comprise the digital asset ecosystem, and as we advocate through our leadership in groups like ADAM for the development of fair and orderly markets, we can’t help wondering when the “regulation by enforcement” approach will give way to more constructive guidance that the industry can follow more systematically, rather than trying to pull out shreds of policy from the collection of lawsuits brought by regulators on crypto firms.
It’s clear that the SEC doesn’t like ICOs and considers SAFTs as securities; the CFTC has unambiguously defined bitcoin and ether as commodities, and it has enabled digital asset derivatives markets to develop through a handful of designated venues (CME, Bakkt, etc.); and FinCEN has clearly laid out its expectations in terms of KYC/AML and adherence to the BSA. But what about the multitude of more complex and significant questions the industry is struggling with? SEC Chair Clayton continues to cite price manipulation as the primary reason the market is not ready for a crypto ETF, but what guidance have regulators issued to combat it? Why are there such fundamental disagreements between the SEC and firms like Telegram and Kik over whether their token offerings were unregistered securities sales, even after the SEC issued a framework for assessing token classification? What licenses do firms need to conduct digital asset activities and how can they navigate differences between federal and state rules?
‘Regulation by enforcement,’ according to one definition, occurs when “enforcement agencies bring actions against businesses without having previously given notice that … the conduct that is the subject of the action violates existing law.” There is ample precedent across different industries for the widespread criticism of regulators who take this approach; examples include the Consumer Financial Protection Bureau, the Federal Trade Commission, and the SEC’s actions against independent financial advisers. Although in those cases the relevant regulator might be easier to identify — as opposed to the amalgamation of federal agencies who claim a slice of the crypto pie — it is time for the SEC and other agencies to move beyond the regulation by enforcement approach, and work with industry to address the issues that will enable the U.S. digital asset industry to truly advance into a global leader.