Former SEC Agent: Watchdogs and Crypto Firms Need Open Dialogue

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The common view of the cryptocurrency landscape is that this is the wild Wild West, with speculative activity spiraling out of control, and with regulators on the move, eyeing a new set of laws and guardrails that need to be. hastily developed and implemented.

The rhetoric is heated, to say the least.

Even the chairman of the United States Securities and Exchange Commission, Gary Gensler, referred to the Wild West classification earlier this summer when he said watchdogs must crack down on fraud and abuse around the world. cryptography. He also said there needed to be more troops and a broader mandate to regulate exchanges and trading platforms.

These and other comments, from Senator Elizabeth Warren and Treasury Secretary Janet Yellen, underscore the urgent need to curb abuse and the threat to the financial system as a whole.

Read also: Yellen sounds the alarm on crypto fraud; Put identity verification in the spotlight

But as Ashley Ebersole, a Washington-based financial and securities regulatory partner with Bryan Cave Leighton Paisner and a former SEC attorney, told Karen Webster in a recent interview, we’ve already put the laws in place. and the infrastructure to regulate cryptocurrencies in a way that would benefit all stakeholders.

A meeting of minds

Achieving this, however, will require a meeting of minds between the authorities and the private sector to help cryptocurrencies move beyond speculation.

As Ebersole said, in order for cryptocurrency or decentralized finance (DeFi) to generally reach their full potential, regulators need to determine what their stance will be. And I hope it will be more reasonable and more accommodating. “

The reality of the crypto arena is that it’s not as wild and woolly as some critics might claim.

Ebersole noted that the cryptocurrency industry’s Wild West tenor had certainly been tamed somewhat from his own time with the SEC, which spanned from 2015 to 2019.

Back in the day, he told Webster, with the increase in initial coin offerings (ICOs) and various crypto-related touts, there were people who didn’t have any legitimate plans for them. they were just trying to commit fraud. There are fewer of these types of projects these days, and the market has matured a bit.

This means that these days it was less likely that large sums of money would be spent on products and projects that did not have consistent compliance strategies in place. It took the industry away from the DIY mindset that marked the end of the last decade, when individuals and businesses thought they could (or should) create new assets and exchanges without the help. lawyers or regulators.

Ebersole noted that while DIY coin offerings may be appealing to advocates of decentralization, this strategy would be akin to launching a broker / trader on Wall Street without the input of a lawyer specializing in decentralization. securities to illuminate the risks, responsibilities and burdens of compliance. Obviously, DIY is not an optimal strategy when large sums of money change hands between different parties and counterparties.

The what and the how

As things have calmed down a bit and cryptos have entered the mainstream, it is important to understand what cryptos are and how, how they should be governed.

As to the what, the ongoing XRP / Ripple case where the SEC filed a complaint last December alleging that Ripple issued and sold unlicensed securities to the general public will provide some answers.

Also read: Ripple Files Response to SEC Complaint Regarding XRP Sales

Generally speaking, the SEC maintains that XRP is a security and therefore should be regulated as such. Ripple says the token exists as a medium of exchange, used in domestic and international transactions, so it shouldn’t be treated as security.

It all depends on the applicability of SEC v. WJ Howey Co. of 1946 of the United States Supreme Court (and, by extension, the Howey test derived from that case), which concluded that investment contracts, a type of securities, involve an investment of money . in a joint venture, with an expectation that benefits from the entrepreneurial or promotional efforts of others. The SEC broadcast with the DAO 2017 report that securities laws could apply to digital assets, and in 2019 proposed a framework illustrating how Howey is applied to digital assets.

Regulators argue that crypto players need to be watched, but these entities argue that using an 80-year-old law to regulate digital technology is folly. But as Ebersole rhetorically asked, why wouldn’t Howey, which is based on principle, be applicable after all? And, he added, maybe Howey’s app leads to the conclusion that XRP is not security.

There’s a reason the SEC lawsuit focuses on historic conduct. If you watch something like Ripple today, he said, you’ll see an ecosystem that can be decentralized enough that it no longer classifies as security. Extrapolate a bit, and depending on the level of decentralization, Ebersole argued, the SEC should likely shift execution jurisdiction over XRP to the derivatives market supervisor, the Commodity Futures Trading Commission (CFTC).

If this were to happen alongside the ongoing movement towards decentralization and the rise of decentralized finance, as well as a move away from SEC oversight issues, questions would arise about consumer protection.

I think it will be difficult for these markets and instruments to reach the size and potential that many have foreseen for them without some sort of regulation being imposed, ”said Ebersole.

DeFis model: card networks?

Ebersole said that one can still buy DeFi coins and other cryptocurrencies and transact there on centralized exchanges.

And in this ecosystem, it is conceivable that a centralized exchange would set up a mechanism similar to that of networks and credit card issuers and could stipulate that if someone makes a transaction with a crypto coin and they If the counterparty was found to be fraudulent (and the money was lost), the exchange itself would absorb that loss, instead of the sender or retail investor. The benefit of this exchange, with a safety net in place, would be to bring in risk-averse individuals and investors who would otherwise not be in the crypto space at all.

As DeFi keeps cryptocurrency transactions away from exchanges, however, we can see the SEC and other agencies if they see or suspect fraud issue subpoenas or cease and refrain from ordering Amazon Web Services. or to other players who provide the infrastructure or pipes that allow the movement of cryptos and smart contracts through the cloud.

To achieve a reasonable and accommodating regulatory environment, Ebersole said, crypto companies themselves, exchanges and issuers may need to relax their approach to regulators. The mindset that the SEC is simply seeking them out and keen to initiate enforcement action after enforcement action is unproductive, although history may mean it continues to be enduring.

Any reasonable regulation should leave room for input from the industry side of the equation, the private sector itself and according to Ebersole, these companies can then suggest regulations that are workable and that would be wise to impose.

Safe harbor initiatives that allow crypto companies to launch projects with a predefined grace period before regulations go into effect or detailed discussions when regulatory actions are not being considered could also prove useful.

If the two sides can somehow put their swords down a bit or at least put them away and sit down and have a good chat, that would be the way forward, Ebersole argued.

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NEW PYMNTS DATA: 58% OF MULTINATIONAL COMPANIES USE CRYPTO-CURRENCY

By the way: Despite price volatility and regulatory uncertainty, a new study from PYMNTS shows that 58% of multinational companies are already using at least one form of cryptocurrency, especially when transferring funds across borders. The new Cryptocurrency, Blockchain and Global Business survey, a PYMNTS and Circle collaboration, polling 500 executives examines the potential and pitfalls that crypto faces as it becomes part of the mainstream financial sector.

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