SEC Chair Has It Right On Crypto Regulation:
Response To Gary Gensler's Op-Ed
By Willie J. Costa & Vinh Q. Vuong
In response SEC Chair Gary Gensler's Op-Ed in The Wall Street Journal.
Gensler hits upon a critical component of legal framework: that which in engineering is called a function-based (or function-driven) design philosophy. This is why it's critical to get the broad underpinnings of regulation correct rather than trying to address specific issues right off the bat - you can always tighten the vise later.
The crypto collapse is one of the most recent reasons why the industry and SEC need to work hand in hand to create safety for investors. Forget about the criminality involved in crypto - that problem will resolve itself over time - and focus on the fundamentals. Is crypto a 'security,' in the strictest sense of the word? Not necessarily, because as mentioned before it still fails two of the tenets of the Howey test. But it *IS* necessary to establish guardrails to govern how it must exist withing the financial universe; it's also necessary to draw a strict bright line between cryptos that are blatantly securities (like ICOs) and those like stablecoins and asset-backed coins that are very clearly within the realm of commodities.
The key to both of these asset types is disclosure, which is mentioned explicitly in the article and which we've both harped on about for some time now. It doesn't matter if your platform is literally minting gold or wildly speculating: what matters is that the investors are informed according to the established requirements for doing so. That falls directly in the SEC's court.
That Gensler is openly willing to talk with crypto platforms is a huge opportunity. It will establish the differential privacy issue that we've been pushing for well over a year, offering pseudonymic protection to investors while still requiring open disclosure of the platform managers, because at the end of the day the economic impact is indelible. And this willingness to engage with industry will become even more important as crypto continues to evolve to incorporate the unbanked and underbanked, who are the least financially sophisticated, most deserving of defi's benefits, and the most vulnerable of all possible users.
There also needs to be a bright line between blockchain as a technology and crypto as an economic vehicle. Part of good regulation is explicitly stating what an agency will not regulate - in this regard, consultation and agreement with industry is paramount. The SEC quite frankly do not know (and may not understand, or even care) what is needed and necessary for innovation and tech development, but they *DO* happen to be pretty good at knowing what constitutes a security. A standing subcommittee of some sorts - or some other avenue for interactive legal expertise - that will regularly be accessible to industry leaders to assist in interpreting legal boundaries (both when a platform is getting close to being a security/investment entity, as well as what aspects of technological capability and function are not of interest to the SEC) is absolutely mandatory.
In response SEC Chair Gary Gensler's Op-Ed in The Wall Street Journal.
Gensler hits upon a critical component of legal framework: that which in engineering is called a function-based (or function-driven) design philosophy. This is why it's critical to get the broad underpinnings of regulation correct rather than trying to address specific issues right off the bat - you can always tighten the vise later.
The crypto collapse is one of the most recent reasons why the industry and SEC need to work hand in hand to create safety for investors. Forget about the criminality involved in crypto - that problem will resolve itself over time - and focus on the fundamentals. Is crypto a 'security,' in the strictest sense of the word? Not necessarily, because as mentioned before it still fails two of the tenets of the Howey test. But it *IS* necessary to establish guardrails to govern how it must exist withing the financial universe; it's also necessary to draw a strict bright line between cryptos that are blatantly securities (like ICOs) and those like stablecoins and asset-backed coins that are very clearly within the realm of commodities.
The key to both of these asset types is disclosure, which is mentioned explicitly in the article and which we've both harped on about for some time now. It doesn't matter if your platform is literally minting gold or wildly speculating: what matters is that the investors are informed according to the established requirements for doing so. That falls directly in the SEC's court.
That Gensler is openly willing to talk with crypto platforms is a huge opportunity. It will establish the differential privacy issue that we've been pushing for well over a year, offering pseudonymic protection to investors while still requiring open disclosure of the platform managers, because at the end of the day the economic impact is indelible. And this willingness to engage with industry will become even more important as crypto continues to evolve to incorporate the unbanked and underbanked, who are the least financially sophisticated, most deserving of defi's benefits, and the most vulnerable of all possible users.
There also needs to be a bright line between blockchain as a technology and crypto as an economic vehicle. Part of good regulation is explicitly stating what an agency will not regulate - in this regard, consultation and agreement with industry is paramount. The SEC quite frankly do not know (and may not understand, or even care) what is needed and necessary for innovation and tech development, but they *DO* happen to be pretty good at knowing what constitutes a security. A standing subcommittee of some sorts - or some other avenue for interactive legal expertise - that will regularly be accessible to industry leaders to assist in interpreting legal boundaries (both when a platform is getting close to being a security/investment entity, as well as what aspects of technological capability and function are not of interest to the SEC) is absolutely mandatory.
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