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.
- 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.