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Policy Series: It's Time To Go On Offense | Rebecca Rettig, Jake Chervinsky

Wed Jun 14 2023

SEC Enforcement Actions and Regulatory Perspective

  • The SEC has brought enforcement actions against Binance and Coinbase for allegedly violating federal securities laws.
  • The SEC believes that all digital assets except for Bitcoin are securities, including staking services and stable coins like USD.
  • There was relief in the industry that crypto did not collapse immediately after the SEC's actions.
  • It is unclear what the SEC will target next, but they may go after tier one d5 protocols or L1s.
  • The SEC is moving away from centralized exchanges and focusing on software activities that facilitate transactions for users.
  • The SEC has proposed rulemaking to bring DeFi protocols within their scope, which may require them to register as an exchange.
  • The SEC's recent enforcement actions against Coinbase suggest they are attacking DeFi through both rulemaking and enforcement.

Impact Litigation and Legislative Counteractions

  • The industry needs to stop being defensive and start going on offense through impact litigation.
  • Coinbase went public under a different chair of the SEC, highlighting the separation of powers in the United States government.
  • The legislative branch may be counteracting some of what is happening in the administrative branch regarding crypto regulation.
  • Robinhood's General Counsel supports Coinbase's argument for clarity around registering tokens with the SEC.

Regulatory Clarity and Frustration

  • There is a need for regulatory clarity in the crypto industry, but there are conflicting statements from different agencies and states.
  • The SEC has not provided a clear path for exchanges to register, causing frustration and potential abandonment of the US market.
  • Coinbase's strategy is to potentially use the mandamus process to force the SEC to provide guidance.

McHenry-Thompson Bill

  • The McHenry-Thompson bill creates regulatory clarity for digital asset markets by addressing legitimate concerns about risk.
  • The bill addresses valid concerns about market manipulation and other market integrity issues without sacrificing decentralization and disintermediation.
  • The bill is a joint effort between the House Financial Services and House Agriculture Committees.
  • The draft that came out is a discussion draft, and Congress is taking seriously the need to discuss this with industry and the public.
  • The bill addresses many realities of how the industry works, including end-user distribution, concurrent jurisdiction between SEC and CFTC, capital formation, and information asymmetries.
  • The definition of a decentralized organization excludes any organization directly engaged in an activity that requires registration with SEC or CFD.

Draft Bill on NFTs and Cryptocurrency

  • The podcast discusses a draft bill that aims to clarify the regulation of NFTs and cryptocurrency.
  • The bill includes provisions for end user distributions, such as air drops, which are not considered investment contracts or interstate security transactions.
  • There is uncertainty around how to address risk in this environment, and there may be trade-offs in clarifying certain aspects of the regulation while leaving others uncertain.
  • The bill is currently an all GOP bill and will need democratic support to pass through Congress.
  • It is important for individuals to engage with their representatives on this issue and communicate their support for innovation in the cryptocurrency industry.

Delegation of Authority to SEC and Checks and Balances

  • The SEC has jurisdiction over deeming what is and isn't a decentralized network, which could be problematic.
  • The bill defines decentralization, functional networks, and sets timelines for hearing back from the SEC.
  • Ultimately, decisions made by the SEC can be appealed to the courts for interpretation of the law.
  • This issue of delegation to agencies is a partisan issue with Democrats more comfortable delegating authority and Republicans less willing to do so.
  • The discussion draft tries to draw a compromise by delegating authority to the SEC but with checks and balances in place.

Global Regulatory Landscape and UK's Role

  • Other jurisdictions like the UK are moving faster than the US in terms of crypto regulation.
  • There is an exodus of companies from the US to other countries like the UK, Dubai, Hong Kong, and Singapore.
  • The most optimistic timescale for getting market structure legislation and stablecoin legislation done is before the end of next year.
  • These bills have support from Republicans in the house, but may die in the Senate without enough democratic support.

Infrastructure Bill and Tax Compliance

  • The infrastructure bill has new provisions in the tech tax code that require tax reporting from people who are not currently doing it.
  • The question is whether this applies to non-custodial front-end providers like DeFi, and the IRS has yet to define the term "broker" in this context.
  • There is still no clarity on tax compliance and crypto, but when the IRS publishes a draft of broker rule making, it will be a big issue.

Perception of Crypto Industry and Engagement with Representatives

  • Policymakers have varying views on crypto, with some being skeptical and others having an understanding of the technology and nuances.
  • Positive use cases and stories can help show the benefits of crypto technology at a local level.
  • Engaging with representatives and refining the McHenry Thompson bill draft is an opportunity for industry engagement.
  • It's important to call representatives, be proactive, support VA's efforts, and continue building.

Industry Outlook and Reliable Sources

  • Keep building, even if it feels rough at first.
  • The SEC may have more complaints in store for the crypto industry.
  • Avoid flooding on Twitter and focus on moving forward.
  • Successful founders tend to stay calm and keep their heads down while building towards their goals.
  • Crypto Twitter will likely continue its usual behavior.
  • It's important to listen to reliable sources for accurate information about the industry.