SEC’s approach to crypto assets is flawed, says Paradigm

Paradigm argues that the SEC’s antiquated approach to crypto regulation is flawed and counterproductive.

Web3 venture capital firm Paradigm has published a policy paper criticizing the United States Securities and Exchange Commission’s (SEC) crypto industry regulation.

The company, which invests hundreds of millions of dollars in crypto and web3 startups, argues that SEC Chair Gary Gensler’s attempts to force crypto assets into a disclosure framework that may not be suitable are bad policy-making.

Outdated regulatory framework for crypto

The paper, published on April 21, highlights the SEC’s inability to provide essential information to crypto asset users and investors. According to Paradigm, the current disclosure policy was developed in the 1930s and is outdated, having been designed “for centralized companies issuing securities,” whereas the crypto market is fundamentally different.

According to Paradigm, securities confer legal rights against a centralized entity, whereas most cryptocurrencies provide technological capabilities within a protocol rather than legal rights. Moreover, crypto assets can operate autonomously and maintain their full functionality without the assistance of their issuers.

The policy paper urges the SEC to modify its current disclosure framework to accommodate new technologies and asset classes, arguing that the SEC cannot effectively regulate crypto asset markets without significant changes.

SEC criticism shared by other industry reps

Several other crypto industry representatives share Paradigm’s critique of the SEC’s policies. In February, the stablecoin issuer Circle CEO Jeremy Allaire noted that the SEC is not the right institution to regulate stablecoins.

Warren Davidson, a congressman, has also made a point of criticizing the agency and its policies. On April 16, he proposed legislation to replace Gensler with an executive director who reports to the board.

In an April 18 hearing on SEC oversight, Gensler was grilled by Patrick McHenry, chair of the House Financial Services Committee, who argued that an asset could not be both a commodity and a security. Gensler refused to say what he thinks of Ether’s classification.

The criticism of the SEC reflects the challenges faced by regulators as they seek to adapt to new technologies and the changing nature of financial markets. While some argue that the SEC’s approach is too heavy-handed and lacks nuance, others believe the agency needs to take a more aggressive stance to protect investors and prevent fraud.

The debate will likely continue as the crypto industry evolves and regulators grapple with new challenges.