The SEC and crypto regulation: Why the delay in rulemaking?

The U.S. Securities and Exchange Commission (SEC) is yet to issue straightforward steps to clear out the ongoing frenzy about cryptocurrency regulation. The regulatory body appears to be “taking its time” to establish clearer laws, with many enthusiasts expressing concern that rulemaking could take years. 

Gary Gensler, the SEC chair, is at the center of the uncertainty dubbed “providing clear guidelines to regulate crypto.” He has spoken his mind several times, articulating viewpoints criticized by the crypto community. The current confusion raises the question, are the SEC and its chairs seriously considering proposing definitive laws in the future?

Coinbase asks for new digital asset rules

On April 24, Coinbase filed a lawsuit asking the SEC to respond definitively to the exchange’s petition for new digital asset rules establishment. On May 16, the SEC formally responded that rulemaking could take years.

Further, they emphasized that enforcement actions will not stop. The regulator argued that it faced no obligation to meet the Coinbase requirements in its petition, saying that the reforms were complex and could not be achieved quickly. Hence, they called for Coinbase’s petition to be denied.

Paul Grewal, the Coinbase Chief Legal Officer, responded to the regulator on Twitter, saying the filing might be the first time the SEC gave views on creating rules for the crypto industry.

Grewal further argued that the response reinforced the industry’s demand for more clarity on digital asset rules. He added that what the SEC considers to be within or without their jurisdiction still needs to be clarified and could continue changing its mind with time.

Grewal highlighted that the SEC said public statements by Gensler should not be considered formal guidance from the SEC, and the public should not rely on them.

Gensler criticized for crypto regulation approach

In February 2023, Gary Gensler, the SEC Chair, suggested that all cryptos apart from bitcoin were securities. However, as many crypto lawyers pointed out, Gensler does not determine the law and its application. His input does matter, but the court is mandated to determine the law.

On April 18, during a Financial Services Committee hearing, Gensler was questioned by Majority Whip Tom Emmer (MN-06) regarding the SEC regulation-by-enforcement agenda. According to Emmer, Gensler is “incompetent” and was inappropriately regulating the crypto industry by making public statements. 

Emmer added that the SEC chair often contradicts himself, bringing more chaos to the crypto space. As a result, crypto firms were moving abroad due to the hostile regulatory environment. 

In his testimony, Gensler highlighted that the goal is “to protect our ‘clients’: U.S. investors.”

XRP case: what is security and what isn’t?

The Ripple v. SEC case may become a landmark event in the history of cryptocurrency regulation. It started in December 2020 when the SEC filed a lawsuit against Ripple for selling XRP, saying that it was an unregistered security and not a commodity. In addition, it was accused of illegally raising $1.8 billion from selling the token. 

As the case entered its third year, both opponents tried to identify weaknesses in each other’s argument. On May 13, Stuart Alderoty, the chief legal officer at Ripple, criticized the SEC for their attempt to misinterpret the Howey test, specifically on “common enterprise.” 

The regulator had argued that the XRP fungibility acted as common enterprise evidence. However, Alderoty highlighted a difference between “common enterprise” and “community of interest.” Hence, the SEC lost the argument, Alderoty said.

LBRY accuses SEC of double standards

In May 2023, the SEC decided to revise the penalty imposed on LBRY, a crypto startup, citing financial difficulties. In November 2022, the SEC issued a $22 million penalty saying LBRY violated the regulator’s laws in selling LBC, its cryptocurrency. Later, they revised it to $111,614. 

LBRY, on the SEC decision, accused it of a dual narrative. 

From a broader perspective, the LBRY challenge shows the general lack of a clear regulatory framework for digital assets, which is a challenge for the crypto industry.

Further confusion on the Bittrex case

On April 18, the SEC categorized six cryptos as securities during the Bittrex crypto exchange lawsuit. The lawsuit argued that the exchange did not register with the regulator as an exchange, clearing agency, or broker-dealer, a requirement under the Securities Exchange Act of 1934.

For the lawsuit to proceed, the SEC must establish that at least one of the exchange’s tokens was security. Hence, they labelled Dash (DASH), OMG Network (OMG), Monolith (TKN), Algorand (ALGO), Real Estate Protocol (IHT), and Naga (NGC) among the “non-exhaustive list” of crypto asset securities. 

Despite the SEC statement, none of the mentioned tokens have been issued with charges at the time of writing. Lawrence Law counsel J.W. Verret highlighted that the claims made by SEC would not survive a challenge in court, and the parties would settle. According to Verret, a final answer would not be given and that is why the SEC is making aggressive claims. 

Earlier in March, Bittrex announced that it would shut down operations in the US by April 30, 2023, because of regulatory uncertainty. 

In June 2023, House Republicans introduced a draft proposal to bridge the current crypto regulatory framework gaps.

As seen in the European Union’s proactive approach to crypto regulations, there’s an urgent need to establish straightforward rules that safeguard investors and foster innovation and growth in the crypto market.