While We Wait for Laws, We Need Better Interpretations of Existing Regulation

This publish is a part of CoinDesk’s 2019 Year in Review, a group of 100 op-eds, interviews and takes on the state of blockchain and the world. William Mougayar is the writer of “The Business Blockchain,” producer of the Token Summit, and a enterprise investor and advisor.

When it involves US cryptocurrency regulation, one college of thought says it’s value ready for Congressional motion to ship a friendlier regulatory setting, leading to a re-energized blockchain market and underlying entrepreneurial exercise.

Another viewpoint, which I share, says Congress offers no magic capsule or panacea as a result of very long time it takes to cross new acts and payments. Instead, we have to search modernized interpretations of present regulation, particularly securities legal guidelines below the SEC’s purview.

Few New Acts Since 1933

There is little hope in seeing a brand new cryptocurrency or blockchain-related act emerge from the House or Senate within the subsequent 12 months, if not longer. This is election 12 months, so consideration span is elsewhere. Also, we have to issue within the ongoing distractions on omnipresent geopolitical, financial or social agenda objects inside the United States and past. The blockchain faces all of those previous and competing priorities.

In eight a long time of historical past, the SEC has been moved by a comparatively small variety of new items of laws. From the impartial company’s website online: the Securities Act of 1933; the Securities Exchange Act of 1934; the Trust Indenture Act of 1939;Investment Company Act of 1940; the Investment Advisers Act of 1940; the Sarbanes-Oxley Act of 2002; the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and the Jumpstart Our Business Startups Act of 2012.

Since the Securities Act of 1933, there have been solely seven different acts, 4 of which got here earlier than 1940, adopted by three extra after 2002, and none for greater than 60 years in between. That’s a mean of 1 act per decade. Based on this, it’s onerous to think about a devoted monetary blockchain act rising in 2020.

There is a typical sample to those acts: they are typically reactionary outcomes to important incidents. The Securities Act of 1933 and the Securities Exchange Act of 1934 have been born of the severity of abuses that led to the crash of 1929. The Sarbanes-Oxley Act of 2002 was prompted by the Enron scandal. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was concocted within the aftermath of the 2008 international monetary disaster.


The Facebook-Libra mid-2019 announcement triggered a blip within the political consideration scale. After Congressional Hearings July-October, the House of Representatives proposed a brand new Bill to determine the remedy of managed stablecoins below the 1933 Securities Act, titled “Stablecoins Are Securities Act of 2019.” This invoice was squarely aimed to restrict the wingspan of the Libra challenge. However, it confronted instant criticism. It was rushed and resulted in additionally being a possible risk to different present stablecoins. This proposed invoice was throwing the child with the bathwater.

Since 2013, there have been near 100 various blockchain or FinTech associated legislative proposals, not together with uniform state payments (Source: Digital Asset Affairs). The 5 that handed talked about blockchain in minor methods. In reality, proposed payments have a mean success fee of 2-5%. There is an absence of help required to muscle in legislative change, regardless of the valiant efforts of business organizations such because the Coin Center, Blockchain Association and Digital Chamber of Commerce. Bills and acts are without end dying on the proverbial Capitol Hill vine.

Why No Rulemaking for Blockchain?

A fast scan of the SEC’s Rulemaking Index for 2019 factors to an extended listing of 36 Proposed or Final Rules for amending or updating quite a lot of actions on subjects reminiscent of Accredited Investor Definition, Cross-Border Applications for Security-Based Swap Requirements, Exemptions from the Proxy Rules for Proxy Voting Advice, Payment Methods Modernization, Modernization of Regulation S-Okay objects, and several other different topics.

There is an absence of help required to muscle in legislative change.

These have been very particular and prescriptive updates, a few of them going so far as together with updates to the EDGAR submitting handbook.

The unhappy irony of this discovering is two-fold. First, none of those rulemaking updates included something about blockchain or cryptocurrency. Second, this exercise seemingly passed off with out an attachment to new laws, i.e. the SEC acted on their very own, primarily based on market suggestions and the will to constantly modernize their oversight processes.

Sadly, the SEC has not proven an analogous diploma of willingness to create fashionable interpretations for cryptocurrency with the identical vigor and depth they’ve given different points of the securities legal guidelines.

Nothing new right here

Instead, the SEC resorted to often releasing haphazard steerage statements (that weren’t even according to one another), initiating dozens of investigations, and launching a number of lawsuits or enforcement actions. All and all, the SEC steadily left the business longing for extra readability or prescriptive tips that would have taken under consideration the revolutionary implications of token-based tasks who have been gasping for air and clamoring to see the sunshine of day below a friendlier regulatory local weather.

Regrettably, no added perception, readability or classes have resulted from this enforcement-led technique and agenda. The SEC stored implying there was nothing new right here, that the present securities legal guidelines have been ok, and that firms ought to line-up to observe these guidelines.

But firms didn’t line as much as spend $2M in authorized charges to observe a Reg A+ course of, because the SEC might need wished. Instead, the vast majority of US-based tasks both folded their ambitions or fled to extra clement worldwide jurisdictions.

Companies didn’t line as much as spend $2M in authorized charges to observe a Reg A+ course of.

We realized in 2019 that Reg A+ is just not the mannequin. Only two firms filed below that course of (Blockstack and YouNow); solely Blockstack has launched an providing. Fast-forward to now and Blockstack’s token worth is trading at one-third of its providing value, having misplaced cash for customers who have been traders.

Ironically, submitting below the SEC guidelines was an argument utilized by the SEC to pinpoint the decreasing of dangers and losses. This exhibits that even if you happen to adopted the (costly) SEC regulatory course of, customers wouldn’t be proof against probably shedding their cash. Of course there are various different success components in play, however the SEC is just not so attuned to those nuances. This additionally means that cryptocurrency and blockchain technology deserve their very own share of rulemaking.

Is Hester Peirce Our Only Hope?

It could be improper to imagine that everybody on the SEC is oblivious concerning the blockchain. Commissioner Hester Peirce has been a breath of recent air, and maybe the one seen hope that the SEC may in the future enhance their positions.

Through her many speeches, Commissioner Peirce has given the business hope and a glimpse of what a blockchain-friendly SEC might be doing.

For instance, this quick passage from a current speech entitled Broken Windows: Remarks earlier than the 51st Annual Institute on Securities Regulation, sums up the somber actuality we’re in:

“I am concerned about how the SEC has regulated this space because I believe our lack of a workable regulatory framework has hindered innovation and growth. The only guidance out of the SEC is a parade of enforcement actions and a set of staff guidance documents and staff no-action letters…Of particular concern is that these enforcement actions and guidance pieces, taken together, offer no clear path for a functioning token network to emerge.”

What The SEC Could Have Done

Many people within the blockchain business would rejoice on the considered Hester Peirce turning into the subsequent SEC Chair, together with the anticipation {that a} change of management would usher a optimistic shift in US regulatory technique.

While we shouldn’t maintain our breath for brand new Congressional motion on cryptocurrencies. But, whereas we’re nonetheless caught with a complacent SEC stance, we might dream somewhat about what a greater regulatory local weather for cryptocurrency might have appeared like.

Here is an inventory of potential actions that would have been undertaken by the SEC:

  • Introduce new submitting processes with outlined disclosure standards and particulars tailor-made for blockchain technology tasks.
  • Institute a Safe Harbor coverage with particular phrases and situations to alleviate certified tasks from the burden of pointless compliance necessities.
  • Restrict the quantities to be raised throughout token choices as a method to restrict the potential downsides.
  • Provide extra prescriptive and exact steerage that entrepreneurs can apply with out guesswork and with much less authorized assets.

As nicely as making concrete motion, the SEC must reply two vexing, however basic questions, which it principally avoids:

Why are there no modernized rulemaking updates for cryptocurrency and blockchain technology?

Why are the suggestions and concepts behind a lot of Hester Peirce’s speeches not being adopted up by the SEC?

The blockchain novelty facet is starring the SEC within the eye, however they continue to be in a state of denial that one thing is new right here.

The world was anticipating the US to steer on regulatory steerage for blockchain technology, however the SEC has not answered the problem. Instead, we’re confronted with a panoply of native regulatory positions from 130 nations which are as various as their peoples, whereas being troublesome to reconcile for the common entrepreneur who should assume international.

There isn’t any level “HODLing” hope for brand new Congressional laws, however we will want for a brand new chapter of extra enlightened SEC management.

Disclosure Read More

The chief in blockchain information, CoinDesk is a media outlet that strives for the best journalistic requirements and abides by a strict set of editorial insurance policies. CoinDesk is an impartial working subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.


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